VC activity picks up steam in Spain

Alessia Argentieri
07 March 2019

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Spanish venture capital activity maintained momentum in 2018, largely fueled by international players in later-stage rounds. Alessia Argentieri reports

Rising from the ashes of the financial crisis, with a new philosophy and an innovative investment approach, the Spanish venture capital industry has achieved solid growth in the past few years.

According to local industry body Ascri, in 2018 the volume and value of investments in the venture capital space remained high for the second year in a row, recording a total value of €417m deployed across 510 transactions, following a peak in 2017 when €538m was invested across 497 deals. International funds deployed €235m across 84 investments – almost two thirds of the total – and continue to represent the most active players in the local venture capital ecosystem, especially for later-stage funding rounds.

Miguel Zurita, Ascri chair, says: "We have had two consecutive years of record activity in the country, which is great news not only for the industry but for the entire Spanish economy. However, the dependency on international investors is still very high and it is important to move forward in the development of a competitive legal and fiscal framework able to facilitate the access of national institutional investors to the asset class."

The Spanish venture capital ecosystem continues to be polarised in terms of VC origin, where early-stage investments are mostly funded by Spanish VCs, while later growth rounds are mainly provided by international and pan-European funds.

"Almost three quarters of the total volume invested in Spanish startups in 2017 and 2018 came from international VCs," says Oscar Farres, head of innovation and technology investments at the European Investment Fund. "This large amount of capital accounted for around 17% of the deals, which clearly shows how international funds joined only for late-stage and growth rounds. Given this premise, the question for the next few years is whether Spain will continue to be a supplier of late-stage deals to foreign growth venture capitalists, or whether Spanish venture capital houses will be able to grow in size and compete with their pan-European peers."

Facts of life
The market gap becomes particularly pronounced in some sectors, such as life science, where there is a lack of financing and an insufficient number of investors, while other sectors such as software-as-a-service (SaaS) have attracted larger pools of capital and the interest of domestic and international funds.

Jaime Novoa, a partner at K Fund, says: "SaaS startups raised a combined €220m in 2018 in Spain, mostly thanks to big rounds for Travelper, Stratio and Red Points. This is something that we have also observed at K Fund; of the 22 companies in our portfolio, more than 50% are SaaS businesses, in addition to several startups that have a very strong SaaS component within their product offering."

Furthermore, the market has seen a new generation of investors enter the arena with renewed energy and expectations, which have gained ground at the expense of more conservative, established players.

We have had two consecutive years of record activity in the country, which is great news not only for the industry but for the entire Spanish economy" – Miguel Zurita, Ascri

"We have seen a noticeable increase in new managers - mostly successful entrepreneurs who have become VC investors with interesting strategies and innovative proposals - often focusing on one vertical segment within the industry and deploying the resources, skills and know-how to go international and scale up a local champion into a global business," says Farres. "This is a very positive trend that we have already seen in other European markets and represents a sign of increasing maturity of the Spanish VC ecosystem."

Despite these interesting developments, the Spanish VC industry continues to lack attractiveness to local private institutional investors. According to market experts, most VCs have public investors in their LP base and they typically contribute 30% or more of the total funds raised.

Farres says: "The main reasons behind this trend are the lack of a track record from local VC managers and regulatory constraints for pension funds, which make fundraising more difficult and often translate into sub-optimal funding for local startups."

Furthermore, Spanish startups have to face a difficult exit environment, where the scarcity of M&A activity, the lack of interest from Spanish corporations and an underdeveloped alternative stock market for tech companies can pose considerable challenges, reduce exit expectations and be detrimental for the development of the entire industry.