Editor’s note: this is a guest post from Point Nine Capital investor Rodrigo Martinez, who also shared the following disclaimer: “There’s no easy path in entrepreneurship. I won’t claim to have the one and only answer. By highlighting some common issues, I hope that new generations will overcome them. Do you agree or disagree? Happy to connect at @DecodingVC to learn about your view!”

Over the past few years, I’ve been following the development of the Spanish startup ecosystem from abroad. The last couple years at Point Nine Capital and at Index Ventures before.

During that period, I saw the birth of a new generation of leaders “Made in Spain”. I’m proud of our investments in Typeform for example. I also regret missing others like CartoDB or Wallapop.

This experience has shown me some patterns that are hindering the potential of Spanish entrepreneurs.

Market size: The Spanish market is less attractive than it seems

In Europe we’ve seen three patterns of successful startups:

  • International by default: Those that started in small markets and went abroad by need from day one (Spotify, Skype, etc.).
  • Multi-local by scale: Those that started in large markets and used that initial traction to raise large amounts of capital to expand into other geographies (Zalando, Delivery Hero, BlaBlaCar, etc.).
  • US-centric B2B: Those with an early focus in the US market (MySQL, Zendesk, etc.).

Spain is the 5th country in Europe with a GDP of 1 trillion euros and 46 million inhabitants. It’s a big market for a multi-local strategy. Unfortunately, Spain ranks way below in two other key aspects:

Internationalization: Expansion into Latin America is not as obvious as it seems

It’s hard to build a global, or even a European, ‘startup unicorn’ when you’re focused on Spain. Ambitious entrepreneurs go abroad. Most of them decide to go South (Latin America) instead of going North (France, UK, Germany, US, Canada, etc.).

Language barriers might be the main reason behind that. Even so, they tend to face a more familiar business environment in Europe or North America than in Latin America.

Funding: There’s some capital, but it’s mostly local

In the last few years, we have seen a boom in new funds raised in Spain. Some historical investors even pointed to a bubble. More available capital means higher chances for great entrepreneurs to get funded. As most of the funds restrict their investment focus to Spain, some interesting patterns emerge:

  • “Win Spain First”: Spanish investors tend to tell their companies to win the Spanish market first before going international. I don’t believe this strategy fits most cases.
  • Connections to raise international capital: I rarely meet Spanish VCs at events abroad. The lack of networking hurts the international fundraising process.
  • Harder to build expertise: As the number of opportunities to invest in Spain are limited, local investors become generalists. This makes it hard to build expertise in areas that need it (i.e. SaaS, security, marketplaces, hardware, mobile, Fintech, etc.).

Critical Mass: There’s no reference hub in Spain

By splitting the efforts between Barcelona and Madrid, we hamper the ecosystem in 2 ways:

  • Due to the lack of volume, critical resources, like talent or capital are scarce. This is critical when building great companies.
  • It’s hard to share previous knowledge, best practices or experience within the hub.

If Spain wants to be relevant, it needs critical mass to build a successful and sustainable ecosystem.

There are plenty of unprofessional professionals

There was a time in Berlin when a business angel could buy half of a company investing 50,000€. Lucky for everyone, that time has passed a while ago. Those angels had to look for new victims somewhere else or adapt to the new environment. That’s one of the benefits of transparency in an ecosystem.

In Spain, this is still quite common:

  • Half the shares are gone when a company has raised €250,000.
  • In most cases, +10% goes to one or two accelerators in the cap table; +10% to “advisors” +30% for angels who invested €200,000 in three rounds.
  • Plenty of those “advisors” tend to be close to the accelerators and don’t invest any money.
  • Draconian term sheets where investors try to control the company.

Some examples include the use of blocking rights on new funding rounds. Other times they try to maximize their returns with unfair terms like participation rights.

Both cases are examples of short-term thinking and/or greediness. As everyone knows but sometimes forgets, the company will need more funding. Follow-on investors want to see enough shares in the hands of the full-time founding team. This motivates founders to build larger businesses.

Seeing great founders with traction, screwed because of a fucked cap-table, is very sad.

Teams: Everybody is part-time and/or multitasking

Everywhere else, it’s rare to speak with a founder who is not working full-time at their company while fund-raising.

In Spain, you must speak with several people until you find the full-time founder who runs the show. I guess those part-time people are trying to justify their equity stakes.

Opportunities: The best minds are doing copycats in the local market

Berlin is  well-known for Rocket Internet. Rocket is a copycat factory where top-achievers (MBAs, McKinseys, Goldman’s and alike) run the startups.

While it’s not my favorite type of startup, I have nothing against that model. I think it helped build the Berlin ecosystem in a record time. That said, Rocket Internet has a unique competitive advantage with its location and its access to capital. This allows them to overrun competitors.

It always amazes me when I see Spanish top-achievers running copycats with a focus on the local market. I’m even more surprised when their ambition is to be acquired by the large German player.

These copycats have a similar risk as starting another (innovative) business but with none of the upsides. It sounds like the balance between risk and reward is not the right one.

Exits: Small exits are a big distraction

In the startup world, as soon as you start doing things right, potential buyers might knock your door. They will start thinking about your market as an opportunity. Should they buy the startup or invest the time and effort to catch up with it? Those talks almost never end in acquisitions.

Three M&A scenarios are probable:

  1. The buyer wants to expand into the geography or the market segment you lead. They get the large customer base and revenues.
  2. The buyer wants the technology or the team behind the technology (acquihire).
  3. The buyer is afraid of disruption and buys the potential threat outright.

In Spain (1) is the rule, (2) or (2) are nonexistent.

But unfortunately, I’ve seen how distracting those “acquisition talks” are. At that early stage of a business, if the founders turn their attention to these talks,  business suffers considerably. Sometimes, even to the point of bankruptcy.

That previous problem is common in almost all startup ecosystems.  Spain struggles even more for one reason: the average salary in Spain is about €22,000. As a founder, when you get the first offers and you hear about a potential €500,000 exit, that sounds attractive (+20 years of salary). There are some caveats:

  • A €500,000 exit means that the company is probably small.
  • Loss of focus from the core business will cause strain if not startup death.
  • The usual level of dilution, taxes and founder split won’t be enough to pay you for the risk taken on starting the business.

As a corollary, you will only make money with a sizable exit and/or bootstrapping. If you can.

Regulation and taxes are enemies of the entrepreneurs

Incorporating a company in Spain is a tedious and costly process. In the United Kingdom, it takes 24 hours and 15 pounds. Good luck trying to create a stock option plan to incentivize your employees.

On top of legal expenses, if you end up selling the business, you will have to pay up 50% tax on those shares.

If you are one of the lucky ones that open headquarters in the US, you might be taxed on the paper value of your shares thanks to the Exit Tax.

But there’s hope

After seeing that long and painful list, it might not be surprising to see how many great companies are founded by Spaniards abroad (Inaki @ Pixable & Contactive, Iker @ PeerTransfer, Maria @ Chartboost, Pau @ Olapic, Adeyemi @ Identified,…).

But there’s no doubt that Spain is a great place to live and there’s excellent technical talent. It’s also not surprising to see some international founders building their companies here (Philippe @ Kantox, Amuda @ Destinia, the team @ Active VP, David @ Typeform, Marek @ Atrapalo, Ben @ Packlink, …).

Think international and for the long run.  Think about building a global business from day one. Start your business with international co-founders. Raise money from global investors. Hire international talent and do that, not to make a quick profit, but to have a lasting impact. As a side effect, you will also enjoy the ride.

The more global you DNA is, the higher the chances are that you will struggle less with those challenges. Except for the taxes, you can always move to Berlin, and then miss the food and the weather (trust me!)

Keep reading:

Facts and figures: the Spanish startup ecosystem in the first half of 2015

It’s not just the weather: Southern Europe’s startup ecosystem is heating up

Scytl: how a Barcelona-based company transformed the global elections industry in just 15 years

How to successfully obtain an entrepreneur visa (in Spain)

As crowdfunding grows up across Europe, the Spanish government seems determined not to play ball

Featured image credit: INCubed Spain / Flicker

  • Riley Maguire

    I worked in Spain and now work in Latin America. When in Spain I heard about Latam being a next market countless times, but after working here, I wouldn’t recommend it to anybody. There are simply too many cultural differences (low credit card penetration, low transparency and trust with businesses, lack of online payment options and therefore limited business models). I used to think copycatting was terrible, but trying to copycat in markets like these is a task in adaptation that might actually require the best minds in the country.

  • One of the biggest challenges not mentioned – The inability of the Spanish entrepreneur to sell himself and/or his/her product or service. I have met so very few in BCN or MAD that can pitch an idea and get a “wow”. Spanish entrepreneurs need to brush up on their sales skills in a very big way.

  • Erica Brescia

    You’re missing Daniel Lopez @ Bitnami on that list. Daniel is Spanish and the company has a development center in Seville with over 25 employees (the company is now headquartered in San Francisco and has about 50 employees globally, though it is growing quickly.) The company is profitable and growing rapidly. Bitnami is the leading app store for server software and its applications are deployed over a million times every month. Customers include Google, Microsoft, VMware, Amazon and Digital Ocean, among others.

    For all of the reasons you’ve mentioned, we focused from day 1 on the US market (though we now sell globally) and never took funding from any Spanish entities or individuals.

    *Disclaimer: I’m a co-founder.

    • Tanya Flores

      Wishing you much success in the coming years!

  • Michael Julian

    I also believe that a major problem for Spanish startups who aim to operate internationally is the language barrier. The level of English is far below that in Berlin, Holland and pretty much everywhere else in Europe. I think this makes it harder for the founders both in being able to communicate with non-Spanish and for them to recruit top talent who also have good enough levels of English. They are often left needing to compromise by hiring people with a less than optimal fit on the technical and cultural fit side but who have good English. I just got back from South Summit and it seemed like the majority of the Spanish founders and employees had a hard time communicating in English. Have other people had a similar experience?

  • Tanya Flores

    The majority of our clients are in Latin America and I have heard these challenges expressed from our community.
    Copycatting, unfortunately, is even brought to the US when some of these entrepreneurs see it as an easy way to keep scaling to serve the Spanish customers faster, but he and she who does right will reap the rewards long term.
    Rodrigo, you have done an excellent job bringing light to the challenges, but I have no doubt us avid entrepreneurs will continue to rise above them.