Why is venture capital in Spain and Southern Europe growing so much?
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Imagine you founded a company a year ago. You’re a millennial, so of course it’s a tech company. Perhaps it’s a dating app, an on-demand Pokémon merchandise service or, apparently, a wine delivery service. Whatever the product, it solves a particular hardship that you’re experiencing having recently graduated from university and now comprehending the tedium of actually having to work. Your revenues are growing quickly and the service is going viral — friends recommend it to friends and you hardly have to spend any money on marketing. You know that this is going to be huge — you’re solving one of the big problems of your generation, but you urgently need to improve the product and add a few more people to the team. In short, you need funding.
Now imagine that instead of sitting in your garage on the outskirts of Palo Alto, you live in Madrid. Until recently you would be pretty stuck for money, but that has changed. The rise of the incubator, accelerator and business angel ecosystem, along with sizeable exits, successful entrepreneurs, government support for startups and, most importantly, a cultural shift among young people towards entrepreneurialism, all point to the fact that we are in a golden age of technology startups and venture capital in the region.
The VC world leader is still the US, whose venture investments represent a percentage of GDP ten times that of France, Spain, Italy or Portugal. Nonetheless, in only three years the European VC sector has doubled in terms of financing. The number of VC firms founded and amount of capital raised has also doubled, and the average size of a fund has tripled. This explosion of investment is the result of a tripling of exit valuations in 2013–2016, totalling €12B in 2015 (source: Pitchbook).
France, Spain, Italy and Portugal are key players in this post-financial crisis economy, in which we see sustained investment growth and increasingly frequent successful exits. It is not for nothing that Paris, Madrid and Barcelona are among the top European cities in terms of VC investment. This has also grown in Italy and Portugal 6x and 19x in the last two years, encouraging the founding of startups in the region, signifying the beginning of a new era.
In the case of Spain a new generation of accelerators and incubators, accompanied by a growing network of business angels, has cultivated a multitude of investment opportunities which are moving beyond the early stages of development and gaining interest from professional investors, helping them to finance the business and manage their growth in the subsequent stages of evolution. Likewise, in Seed and Series A stages, the growth of increasingly professional funds has created a healthy competition for the best projects, changing the paradigm from one where the investor dictated the conditions to one where the best founders can choose the fund with the best fit. Government institutions have also played an important role in the process, through the fund of funds, FONDICO Global, and also through other grants and debt financing instruments such as ENISA.
At the centre of these interconnected elements is a flow of capital reinvested by successful entrepreneurs, who put their money and experience back into the system. They both create and invest in new tech startups. This phenomenon — the virtuous circle of entrepreneurship — is reflective of a new professional culture, which appeals to millennials: tech-savvy young people see entrepreneurialism as a serious professional alternative to the careers which have historically attracted the best and the brightest, such as investment banking or consulting.
It looks like we’re on track for a golden age of business for Spain and Southern Europe and an exciting opportunity for VC firms in the region.
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