Bloomberg News

Spain’s Startups Leave in Search of Venture Capital

April 21, 2013

Recession May Double Spain’s Banking Bailout Needs

Residential buildings stand on the skyline of Barcelona. The default rate on about 600 billion euros of Spanish residential mortgages stood at 3.8 percent at the end of 2012, up from 2.9 percent a year earlier and 0.4 percent in 2006 before the country’s property crash. Photographer: David Ramos/Bloomberg

After finishing his MBA at Columbia University in New York, Luis Sanz decided not to return home to Spain to launch his Web startup, Olapic.

Sanz says he stayed in New York because his homeland lacks an entrepreneurial culture and has virtually no venture capital industry. Last year, he raised $1 million for Olapic, which helps companies collect photos posted by their customers on social-networking sites such as Facebook (FB) and Twitter.

“In Spain it’s just harder to get funded unless you’re already a big name,” said the 32-year-old telecommunications engineer from Zaragoza. “The U.S. is way more appealing.”

Olapic, which serves about 70 corporate clients ranging from EBay Inc. (EBAY) to the New York Giants football team, mirrors other startups founded by engineers fleeing Spain to start businesses in more promising locations. The exodus is crimping the country’s technology industry and threatens the long-term vitality of an economy suffering from a six-year slump and record unemployment.

The number of new businesses created in Spain annually has dropped by almost 100,000 over the past six years, to 334,516 in 2012 from 426,321 in 2007, according to the National Statistics Institute. Over the same period, more than 2 million businesses have closed.

Unfavorable Ecosystem

“The diaspora of Spanish entrepreneurs is growing, without a doubt,” said Javier Santiso, a professor at Esade Business School in Madrid. “After studying at MIT or Stanford the chances of coming back to Spain and finding a favorable ecosystem are very small.”

Spain, the euro region’s fourth-largest economy, ranks 27th out of 118 in the Global Entrepreneurship and Development Index, trailing France, Germany and 14 other European countries, though ahead of Italy, Poland and Portugal. The index measuring entrepreneurial attitudes, action, and aspirations, is led by the U.S.

High-technology’s share of exports is lower in Spain than most other European Union countries, according to Eurostat. In 2011, high-tech jobs accounted for 3.5 percent of total employment in Spain, less than in France, the U.K., Germany, Belgium or the Czech Republic.

Not all ambitious Spaniards leave the country. Jenaro Garcia founded outdoor Wi-Fi provider Let’s Gowex SA in 1999 and took it public in 2010. In 2012 its sales jumped 71 percent to 114 million euros, and its stock has doubled this year.

Telecommunications engineer Inaki Berenguer found New York City a more hospitable environment for startups. After studying at the Massachusetts Institute of Technology in Cambridge, he started his company on the campus in 2009 and then ran it out of his Manhattan apartment.

Village Investors

“A company with no revenue, like mine, would struggle to survive in Spain because investors look at earnings and cash flow,” said Berenguer, 36.

The company, Pixable, helps people store and organize photos published on social-networking sites. About 5.5 million people have downloaded Pixable, and Berenguer says he has deals with Facebook Inc. (FB:US), Google Inc., Dropbox Inc. and Twitter Inc.

Last year, Berenguer sold Pixable to Singapore Telecommunications Ltd. (ST) for $30 million -- allowing him to pay back relatives and friends from his hometown, a village called Muro de Alcoy, who put up seed money to get the company off the ground and raise further funding in the U.S.

Spain’s culture has hobbled startups, says Victor Conde, a professor at Nebrija University in Madrid. Parents often push their children toward less risky paths, such as government jobs. Schools, which should encourage risk-taking and innovation, are too cautious, and many Spaniards are biased against entrepreneurs, he said.

Movie Villains

“Business owners are still seen as the bad guy in films,” Conde said.

Spain is trying stop the brain drain as it seeks to wean its economy from its dependency on tourism and construction. Prime Minister Mariano Rajoy’s government has pledged to help entrepreneurs access funding and allow startup founders to make lower contributions to the pension and unemployment-benefits system. The government is also drafting a law seeking to reduce bureaucratic hurdles to setting up companies and make it possible for people to do so without putting all their personal assets at risk.

“The government has taken some small steps but hasn’t made much progress, so its program for entrepreneurs isn’t really living up to expectations,” Conde said.

As long as public money drives entrepreneurship, rather than private investment, the economy risks failure to make long- lasting gains, said Pedro Nueno, a professor of entrepreneurship at IESE Business School in Barcelona.

Grabbing Money

“By helping entrepreneurs through incentives we are making a mistake,” said Nueno, who advises startups in Europe, China and Africa. “There are people who grab the money without really knowing what to do, so in just a few months they end up having wasted both their time and taxpayers’ money.”

Until more wealthy Spaniards are willing to risk some of their money on startups, entrepreneurs will continue to flee, said Tontxu Campos, director of the Entrepreneurship Center at Deusto Business School in the northern city of Bilbao.

“It’s not that there’s no money,” Campos said. “There’s just no culture of investing in someone’s ideas rather than real estate.”

To contact the reporter on this story: Manuel Baigorri in Madrid at mbaigorri@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net


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