Investing in Spain: opportunities and sunny outlooks

(and we’re not even talking about the weather)

By Agathe Destruhaut with the help of Christophe Primault, Sébastien Lefebvre, Xavier Lazarus, Julien Macquet, Marc Rougier and Saish Rane.

1. Why we chose to invest in Spain

From entering a nascent market… (pre-2010)

Elaia’s strong interest in Spain is not accidental. Shortly after launching Elaia, Xavier Lazarus, who is half-Catalan, noticed a growing opportunity in this emerging tech ecosystem.

Now, let’s rewind back to the 2000s. At the time, tech was booming in the Silicon Valley, while in Europe, new hubs were emerging, such as London, Berlin, or Paris. And during his numerous personal trips to Barcelona, Xavier detected a market opportunity. Spain at the time was not yet the dynamic ecosystem we know now, but rather a nascent market, with little local and international competition for early-stage deals and opportunities to grasp. Following this personal bias (call it a hunch if you will), Elaia invested in its first Spanish portfolio companies between 2005 and 2010.

Our first success story in Spain is our investment in Agnitio — market leader in Voice ID products. Elaia led their Series A in 2009, and sold it 7 years later to Nuance, alongside a multimillion IP asset sale to a chipset manufacturer for the mobile version of the software. Completing this deal confirmed our initial hunch that Spain would see B2B tech stars emerge at a global level. However, these stars were still hidden beauties in a not-yet-structured market, where cultural proximity was necessary to break into the local ecosystem. At this time, being able to participate in boards held in Spanish or Catalan provided us (as foreign investors) with an unfair advantage as the market was still quite local in its financing and governance.

Anecdote: Xavier Lazarus and Philippe Gire, Elaia’s co-founders, held a due diligence meeting for a Spanish investment at the end of August, on Philippe’s boat in Barcelona’s Port Vell, as they were both on holiday in Spain. In 2009, the question was “will this place remain a vacation spot, or have we stumbled upon a goldmine?”

…to structuring an investment thesis in a maturing ecosystem (2010 onwards)

In the early 2010s, the market started showing signs of maturity and the ecosystem grew, receiving increasing local and international attention and financing. This period was one of the emergence of leading local funds, backing the Series A rounds of companies that went on to become Spain’s first unicorns — e.g. Cabify and Wallapop. Seeing this growth, combined with the success of our first Spanish investments, we decided to extend our outreach in Spain. While our 2012 fund did not specifically include Spain in its foreign investment scope, we invested in Marfeel in 2013. This success finally convinced us of the amplitude of the local momentum and the future opportunities it entailed.

As we do with new investment scopes at Elaia, we developed an investment thesis, a strategy with dedicated objectives, a local network of Venture Partners, and local LPs. Doing so allowed us to integrate Spain as a core geography of our investment thesis, and in turn to become an active player in fostering the Spanish ecosystem.

Our first ‘boots on the ground’ started with Christophe Primault in 2017, ex-entrepreneur (co-founder of GetApp, acquired by Gartner) and business angel, who has been based in Barcelona for over 20 years. Christophe has been working closely with our Digital Ventures team as Venture Partner, on the coverage of Spain and SaaS businesses. His presence in the team allowed us to invest in Geoblink, PricingHub, Holded, and The Hotels Network.

In 2020, Sébastien Lefebvre, joined the Deep Tech Seed team as Venture Partner and supported the first deep tech investment in Spain, Nuclia — the API to integrate AI-power search in any unstructured data source in minutes. Sébastien is a former entrepreneur (co-founded 2 Deep Tech companies, the last one Mesagraph was acquired by Twitter), who has been living in Barcelona for over 5 years. Given the thriving deep tech environment and the success of our collaboration, Sébastien joined Elaia full-time as Partner in the Deep Tech Seed team. Following this appointment, he led the refinancing of Nuclia alongside Crane Ventures.

Today, 16 years after our first investment, Spain represents an integral part of our daily activity. Christophe, Sébastien, and members of the Paris team dedicate a substantial part of their time to covering the Spanish market and significant shares of our funds are dedicated to Spanish companies. From this experience, we’ve drawn a few conclusions and identified trends we consider worth sharing.

2. Building a country-specific ecosystem (today)

Stakeholders of the Spanish ecosystem have successfully built on the country’s strengths to develop a thriving ecosystem. Spanish players have succeeded in fostering innovation in a variety of industries, business models, and levels of technical complexity across the country and in regional hubs.

At a national level, for example, entrepreneurs have benefited from industrial dynamics like the striking example of tourism, the country’s #1 industry. Indeed, hospitality and travel represent a key innovation area, with close to 200 startups financed, unicorns like eDreams or TravelPerk, and one of our portfolio companies The Hotels Network, clearly illustrating this success. Newer industries have emerged as trending sectors in Spain, notably shifting towards B2B models and complex deep tech assets, indicating a forward-looking evolution of the ecosystem.

A. Emerging tech hubs

In addition to country-wide dynamics, local innovation hubs have emerged, all building upon their unique advantages:

• Barcelona: Spain’s leading hub, with a high quality of life that implies attractiveness for employees, regulatory and fiscal advantages attracting employers, and finally public and private players constructing a fertile international tech hub. The city also counts world-class R&D centers (more on this below), favoring the emergence of a deep tech valley in the region.
• Madrid: a close follower, with a strong B2B ecosystem that has emerged, as many big corporations are headquartered in the capital city.
• Valencia: highly worth mentioning, featuring a number of accelerators like GoHub, Insomnia, Social Nest, Demium, or Lanzadera.
• Malaga: a rising hub where public and private sectors converge, marked by recent multinational arrivals like the HQ for Google Cybersecurity, Vodafone’s R&D center, and the Malaga Tech Park focused on circular economy projects.
• Bilbao (and by extension, the Basque Country): an area specialized in Industry 4.0, well backed by local capital and a more favorable provincial fiscal regime, as demonstrated by the presence of the Bind 4.0 accelerator or funds like All Iron Ventures which are based there.

B. The Snowball Effect

‘Success breeds success’; and Spain has not been exempted from the phenomenon. A few of its most successful companies have been around long enough to become fertile grounds for the next generation of entrepreneurs and industry leaders to emerge. The first wave of ecosystem players came out of the 90s and 2000s dot-com companies like Grupo Intercom, eDreams, or Tuenti technologies, which played a decisive role in this process.

Fun fact: On average, the top 15 European unicorns in number of alumni turned founders have each ‘given birth’ to more than 135 founders (State of European Tech 2021).

Some of Spain’s great entrepreneurs and industry leaders came out of Intercom, with exits such as Infojobs or Softonic, and founders like Jesus Monleon (Offerum, Seedrocket, 4Founders), Iñaki Ecenarro (Trovit, Weblogs SL) or Vicente Arias (Offerum, Seedrocket, Coverfy). Tuenti is the former employer of the founders of Cabify, Jobandtalent, and Sequra, and eDreams, where two co-founders of our portfolio company PricingHub — the leading dynamic AI-based pricing platform — are coming from.

And in turn, successes launched by these companies’ ‘mafias’ have become catalysts of entrepreneurial alumni. Cabify is the most prominent example of contributing to Spanish entrepreneurship, with ex-employees who launched companies like Jüsto, Human Forest, InvoPop, or Carbono. In parallel, Glovo announced a new program called Glovo House, designed specifically to support their alumni founders via mentorship, networking and support for raising money.

In addition to being home to future entrepreneurs, successful tech companies have encouraged the emergence of local incubators and investors, as illustrated by the launch of SeedRocket — which accelerated two of our portfolio companies: Holded and Marfeel — and 4Founders founded by ex-Intercom employees, or of KFund by ex-entrepreneur Iñaki Arrola (Coches.com).

Finally, besides breeding the future innovative generation of Spain, local scale-ups are putting in place institutional frameworks to further push the prosperity of the tech ecosystem. Cabify, Wallbox, Factorial, Glovo and others have joined forces to create EsTech, a lobby group to influence national policies, with the ultimate goal to create the next IBEX35 tech companies.

This ‘mafia’ effect, observed first in the Silicon Valley and later in European ecosystems, is an encouraging marker of ecosystem maturity. It indicates the construction of a solid innovation base, supporting a new generation of tech startups, supported by regulatory, institutional, and business frameworks necessary to thrive.

C. A thriving B2B scene

The first wave of Spanish innovation was largely characterized by its B2C successes and the prevalence of ‘B2C copycats’ in the local landscape. However, for the past 5 years, local VCs and other observers have foreseen the shift from this paradigm towards a boom in B2B software and the emergence of local B2B champions. Our take is that Spain provides B2B startups with a market of extensive depth when it comes to SMB customers. This can be illustrated by the recent unicorn Factorial, or by our portfolio company Holded, which was built exclusively by selling to local customers and was acquired at a 9-digit valuation in 2021.

Still, Spain is a relatively ‘young’ B2B market. So what is missing? For B2B superstars to emerge, there are two necessary factors:

1. a landscape of local large corporate companies involved in the ecosystem, as enterprise customers and as promoters of innovation;
2. the capacity to successfully scale and replicate local models internationally, i.e. growing across Europe and globally.

With superstars like Factorial or Jobandtalent emerging, backed by international funds, the Spanish market is heading this way for sure, giving way to the replication of the snowball effect on the B2B tech scene and supporting the ecosystem’s growth.

D. The next European ‘Deep Tech Valley’

Going a step further, the Spanish market has not only adopted B2B tech models but is experiencing a dramatic increase in the number of deep tech players. And as the EU has placed the launch of “Valleys of Deep Tech” at the core of its innovation agenda, Spain is well positioned to become a center for the next deep tech revolution.

The first key indicator of that capacity is the fact that Spain is Europe’s top country with the highest concentration of Ph.D. candidates: over 30,000 students are Ph.D. candidates in Spanish universities. Additionally, Spain gathers a number of world-class research catalysts: public and corporate research centers, and universities.

Zoom on Catalonia

Catalonia has a long tradition with research and is one of the top regions in number of patents per capita. Barcelona alone counts:

• Over 50 research centers listed in the city
• 12 universities with 53 research institutes
• 15 scientific and technological parks to boost tech transfers from public research to private companies
• Top universities:

UPC (Univertat Politècnica de Catalunya) : it is one of Europe’s best technical universities, with the most international Ph.D. students and the largest share of international master’s degree students

UPF (Universtitat Pompeu Fabra)

UAB (Univesitat Autonoma de Barcelona)

UB (Universitat de Barcelona)

UDG (Universtitat de Girona)

• World-class research organizations:

The Barcelona Supercomputing Centre: it notably hosts MareNostrum, and is managed by a consortium composed of the Spanish Ministry of Science, Innovation and Universities (60%), the Government of Catalonia (30%), and the UPC (10%).

CTTC (Centre Tecnologic de Telecomunicacions de Catalunya): a research center focused on technologies related to the physical, data-link and network layers of communication systems, and to the Geomatics, with 9 research units dedicated to technology development and transfer

IBEC (Institute for Bioengineering of Catalonia): a research institute that covers most bioengineering fields, from the most basic research to medical applications, and is an international leader in this area.

IREC (Institute for Energy Research): a research center focused on sustainable energy.

Other Spanish deep tech hubs

• The Google Cyber Center and Vodafone’s R&D center in Malaga
• Notable universities and research centers: UPV, UCM…

Hence, a diversity of players, from universities, research centers, national and local governments, to private big tech companies are operating towards constructing a robust deep tech ecosystem. Catalonia comes again as a striking example of the efforts put into supporting that ecosystem. The region has launched numerous initiatives, notably to bridge the funding gap in deep tech in the region: a tender to manage a tech transfer fund (FITA) promoted by the European Investment Fund and the Catalan Institute of Finance, and a financing initiative of €10M as limited partners of deep tech investors.

These initiatives are crucial to the development of the local deep tech scene. Indeed, although local funding has undeniably caught up in the past 10 years in Spain, there remains a funding gap when it comes to deep tech companies. Our Barcelona-based Partner, Sébastien Lefebvre, who has worked both in the Silicon Valley and in Spain, lays out the equation as follows:

• Silicon Valley’s ingredients for deep tech success: local and international talent + quality of life + education (universities) + adequate funding
• Spain’s current ingredients: local and international talent + quality of life + education (universities)

“The problem is not the funding gap on its own, but rather the consequence of a lack of investors with scientific and technical know-how and entrepreneurial experience. Investing in deep tech requires a strong scientific background and knowledge of the research industry, notably to conduct tech transfers from R&D labs to the incorporation and the funding of fast-growing companies.” — Sébastien Lefebvre, Partner

E. A maturing ecosystem against the crisis

Today, Spain is a structured and mature tech and industrial market, ranked 5th in funding on the EU tech scene (after Germany, France, Sweden & The Netherlands). This maturity can notably be illustrated by the growing valuation of startups, driven by a burgeoning number of unicorns, and numerous exits at 9-digit amounts and above (Igenomix, AlienVault, Holded).

Despite the strengthening of its tech ecosystem, the current ‘VC winter’ is taking a stronger hit on Spanish funding rounds than in other European countries. Indeed, while invested amounts have tumbled across Europe from 2021 to 2022, Spain has seen a steeper decrease in the number of funding rounds than its European counterparts. The number of funding rounds in 2022 has been divided by two from H1 to H2, vs. a -30% decrease in France and Germany.

The explanation for this higher downturn could be twofold:

• Spain is still a relatively smaller market than its European neighbours, and thus has a greater sensitivity to market downturns leading to quicker contraction of the funding dynamics;
• Or, the country enjoys less shock absorption effects as France or Germany in the face of economic crisis, and has thus a hyper-responsiveness like the one observed in the US or Israel, which would in turn mean a quicker period to regain growth.

Is it one, or a little of both? Only time will tell when the ‘VC winter’ has passed.

3. The opportunities of the Spanish market for a foreign VC

Spain vs. other EU countries

• Attractiveness for foreign workers: Barcelona ranks 2nd in the EU among founders as favorite hub to launch a startup, a dynamic illustrated by the acceleration of workforce movement towards Spain after the pandemic.
• Specific and favorable regulations: through tax incentives, favorable regulations, elimination of bureaucratic obstacles, and flexibility in many procedures, Spain’s Startup Law aims at promoting its ecosystem. Among advantages offered: corporate tax reduction from 25% to 15% for 4 years, lower tax rate for international workers, new visas for digital nomads, increased tax deduction amounts and rates for investors, etc.
• World-class technology events: Mobile World Congress and 4YFN, South Summit, etc.
• Education and talent:

Barcelona ranks as the 2nd hub in the European Union with the highest number of startup founders among alumni from local universities.

A number of outstanding engineering schools (UPC, UPF) and business schools (ESADE, IESE, IE). Many foreign students stay and set up companies, and local students who leave and come back. TravelPerk or Qbeast are examples of companies whose founders came to study in Spain and stayed to launch their startups.

Spain capitalizes on a pool of local talents, and its combination with available tech resources, leading to successful stories of trained engineers creating stellar companies from open source technology, like the Holded founders did.

Conclusion: opportunities for a foreign VC

In only 10 years, Spain went from a local, very early-stage and B2C focused market, to a full-fledged and thriving tech ecosystem, where successful investors, institutional and repeat entrepreneurs interact to make it grow. Spain is now a dynamic ecosystem that attracts interests from Europe and the rest of the world, but still has room for growth.

• Funding:

Early-stage (pre-seed & seed) financing is largely covered by local funds (Nauta, Adara, Inveready, 4Founders, Kibo, Seaya, KFund, JME, Bonsai…). The greatest opportunities are still hidden beauties and it is necessary to have the right local network to succeed at finding early-stage gems.

Later-stage funding is where the main opportunity lies. A strong network of local VCs emerged, and they are raising bigger funds, tackling later investment stages, notably Seaya and KFund who raised growth equity funds. In parallel, international VCs have dramatically increased their funding of Series B onwards in Spain, with Tier 1 foreign VCs active in the market (Accel, General Catalyst, Insight, Target Global…)

• B2B:

B2B innovations are increasingly driving the growth of the Spanish market. We expect the B2B scene to keep on growing, favored by current startup successes (Factorial, Jobandtalent), a network of large corporates locating their innovation operations in Spain, and the growth of the deep tech scene.

• Deep Tech:

Spain’s deep tech ecosystem represents a huge opportunity for VCs with experience in the sector. Our take is that there is potential for a virtuous circle: as the first outstanding successes emerge, more investments will be directed to Spain, in turn strengthening the development of the local deep tech scene.

The Deep Tech potential of Spain lies in numerous industries, such as biotechnologies and life science, digital deep tech (AI, ML, computer Vision, cybersecurity…), industrial innovation (quantum, robotics, aerospace…), climate & sustainability (food, agriculture, energy…) — all fostered by universities and dedicated research centres.

Hence, the opportunity for an international fund to succeed in investing in Spain is extensive. However, a few barriers to entry remain:

(1) the necessity to be connected to and an integral part of the local ecosystem,

(2) to have the capacity to help growth-stage companies expand internationally,

(3) and the know-how to invest in complex technologies to address the massive deep tech opportunity.

Elaia in 🇪🇸

Today, Elaia has invested tens of millions in over 10 Spanish companies, developing a strong network within the tech ecosystem and contributing to it for over 16 years. We believe we were right to take this bet, and we think our presence in the Spanish ecosystem has been a mutually beneficial success, as we grew alongside.

We are very proud to be backing tech and deep tech disruptors across the country, and we hope to keep on being an integral part of the Spanish tech scene. To do so, we wish not only to grow alongside but to accelerate this growth, through financing, helping Spanish players become local and international champions, supporting deep tech projects in becoming future unicorns, and pursuing our efforts dedicated to the coverage of the market.

The paradigm where being local was a must-have to be an investor in Spain has shifted, but we still believe our knowledge and presence is our unfair advantage. And it is such that the rest of the team is capable of replicating their industry expertise in making deals in Spain, whether we are based in Spain or France.