Spain is at a pivotal point in the growth of its venture ecosystem. The country has come a long way since the Financial Crisis of 2008 and has witnessed several large entrepreneurial successes. However, there is still a lack of local growth-stage investors in Spain, which means that much of the value of local exits is accruing outside the country. If this does not change, the Spanish ecosystem will not experience the virtuous cycle that emerges from the reinvestment of capital and talent from local success stories. Local founders, investors, and policymakers each need to play their part in enabling local ecosystem development.
Endeavor Insight analyzed investment data and interviewed over 40 founders, investors, and experts to develop short-term and long-term strategies. What does Spain’s entrepreneurial ecosystem need to reach the next level? Read on to learn our findings.
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Spain Was Less Vulnerable to the Global VC Slump in 2022
In recent years, Spain has achieved strong growth in its venture capital and entrepreneurial ecosystem. As the graph below shows, both the number of deals and capital invested in Spain grew tremendously from 2010 to 2021. However, the country was not immune to the global slowdown in VC markets. More than a decade of cheap money, first in response to the Global Financial Crisis and then COVID-19, came to an end early in 2022. The post-COVID financial downturn has involved substantial valuation cuts, uncertainty, and freezes in funding.
Spain has been less vulnerable to these trends than other advanced entrepreneurial ecosystems, primarily because it has a larger proportion of early-stage companies. Valuations at that stage faced less pressure than those of public or growth-to-late stage private companies. Similarly, Spain’s lower amount of scaleup companies meant that the decline in exit activity was less severe than other large European markets from 2021 to 2022, as seen in the graph below. The number of exits fell in Germany and the UK by 32 and 18 percent, respectively. While exit activity also declined in Spain and France, it was by less than 7 percent.
Early-stage companies in Spain looking to scale must prepare to be resilient. Many scaleups are unlikely to reach their 2020 and 2021 valuations. Scaleup founders have already realized the need to reduce their burn rate and solidify their balance sheets, either to avoid raising capital again in the next 18 months, or to buy time before they need to do so. Companies that didn’t raise at high valuations face the same kinds of readjustments, given the market conditions.
The Country’s Dependency on Foreign Investors Is Holding Back Its Entrepreneurial Ecosystem
Local VCs have contributed to the growth of the ecosystem, but foreign investors are still needed for growth capital. The timeline below shows that in the 2000s, Spanish VC firms started to take off, followed by several large exits and unicorn achievements. Several of the leaders of local VC firms are founders-turned-funders who had led their own companies to exits. The large number of founder-led Spanish VCs has garnered a good reputation with overseas players. These investors know their local market, understand what makes a good entrepreneur, and have developed a strong network of peers when building their companies.
Milestones in Spain's Venture Landscape
While local VC funds are growing, there still isn’t enough domestic capital to serve the country’s up-and-coming generation of founders. International capital remains essential — local VCs simply do not have the funds available to meet the existing demand for larger rounds. Because foreign investors are still important for growth capital, local actors should foster good relationships with them to secure the best arrangements for the ecosystem. Beyond large checks, foreign investors also offer global resources and knowledge.
The best investment team for founders is often one in which local and international investors cooperate and complement each other. For partnerships between the two parties to work, they need to build trust and share a common vision for the investee company’s future. Spanish VCs have the local networks, knowledge, and capability to develop and support companies in their early stages. Foreign investors, particularly from large European and US growth funds, are drawn to Spain due to its consistent output of promising entrepreneurs with the potential to scale. For growth-stage founders, foreign investors’ expertise in international expansion, managing capital, company structure, and leadership selection can be highly beneficial. When international VCs recognize the value in connecting with local investors, from coinvesting to sharing deal flow, the synergy benefits the local ecosystem.
Spain Faces Several Barriers to Increasing Growth-Stage Capital
Hurdles in the local ecosystem are hindering growth-stage capital, but those obstacles are identifiable and surpassable. There is optimism within the local VC community, but not enough urgency around the need for growth capital. In our 2023 survey of over 20 Spanish VCs, nearly 90 percent responded that they felt positively about the state of venture capital in Spain. However, fewer than 5 percent reported shifting their stage focus to more growth- and later-stage companies. This suggests that local investors are not able to take on larger rounds.
The Spanish venture ecosystem is at an earlier stage of maturity than other large European countries. France, Germany, and the United Kingdom each outgrew this stage at various points in the past 10 years. This is illustrated by the graph below, in terms of both deal count and the total amount of capital invested. Among the existing number of VC deals, very few in Spain are for growth- or later-stage companies, especially in comparison with major European markets.
Local policies and norms in Spain contribute to this situation. To access more money, local funds need to reach large corporations, including institutional investors like pension funds and insurance companies. These institutions have capital, but are not yet fully engaged in local VC. In many countries, VC funds are split one-third each between public funds, high net worth individuals/family offices, and institutional/corporate firms. The last third is less active in Spain. According to interviewees, capital requirements on pension funds are restrictive enough to make VC investment less attractive than other asset classes. Reforms are needed to make it easier for local pension and insurance funds to invest in venture capital.
Returns would also need to be high for a long period to interest an institutional investor. Less “risky” asset classes like corporate bonds started to become more attractive than VC once interest rates rose and the differential in returns from the two asset classes narrowed. And it may take some time before pension and insurance funds are willing to deploy money to VC, even if regulatory barriers were to ease.
Many ambitious Spanish VCs are looking outside of the country to make their investments. Nauta Capital deploys one-third of its capital in Spain, and allocates broadly equal amounts in the UK & Ireland and northern Europe. Spanish firms like Seaya Ventures and K Fund deploy capital across Spain and Latin America. Others like Samaipata and All Iron Ventures are investing all over Europe.
Implementing regulatory reforms to encourage a change in investment priorities will take some time, but is an achievable goal. Once these barriers are removed, the local ecosystem will have greater capacity for growth-stage funding.
Spanish Founders Can Overcome Market Constraints
In the short term, Spain is producing plenty of high-impact entrepreneurs who have the potential to scale, but constraints in the local market are making it difficult for them to grow their companies. In particular, the lack of large local funds combined with the post-COVID financial downturn have left them with limited options for raising growth capital. To be able to overcome the existing limitations in the ecosystem, founders should know how to survive bear markets and what to expect from investors.
Endeavor Insight spoke with over two dozen investors in the Spanish ecosystem, many of whom focus on early-stage companies. We found that at the scaleup stage, investors are primarily interested in founders who can demonstrate the financial efficiency and viability of their business. In other words, they prioritize founders who get the basics right. Take the brief quiz below to see how well you can predict Spanish investors’ thought processes around scaleups.
Spain Must Learn to Support and Grow Scaleups Locally
In the long term, the future of Spain’s venture ecosystem depends on its ability to support more scaleups and local growth funds that can retain and reinvest the value of their successes.
To achieve a virtuous cycle, Spain will need local investors to move past the early stages and lead large rounds that lead to big exits. Relying on foreign investment means losing out on opportunities for local wealth generation and economic growth. The Spanish ecosystem needs to prepare now to retain more of the value from its homegrown successes before the next group of major entrepreneurial exits.
As the infographic below shows, Spanish companies have created astonishing value from their successes, but the wealth generated is benefitting foreign investors primarily. The country’s 10 largest entrepreneurial exits since 2018 add up to a total of more than $8 billion. However, nearly 4 out of every 5 investors in those companies were not based in Spain. (Given that Spanish investors tend to join at smaller amounts and earlier stages, the actual proportion of exit wealth going to foreign investors is likely to be even higher.) The foreign countries with the highest number of participating investors were the United States, United Kingdom, and France. If local Spanish investors took the lead in funding scaleups, it would retain more value in the domestic market and transform the ecosystem.
Spain needs more high-growth companies that have gone through several funding rounds. High-growth companies provide exits, generate returns for limited partners (LPs), enable future funds, and turn founders into funders. The new generation of VCs raised their first funds in the mid-2010s, which means their first major exits and fund closures should start to be realized over the next few years. If they can bring their LPs great returns on the investments they have made over the past 10 years, more money will likely flow into the ecosystem.
Local Spanish VCs should also undergo a mindset shift, as they need to recognize that managing larger funds will be worthwhile. Founder-led VC firms are well positioned to demonstrate the value of large funds because they have experience raising capital and understand the benefits of local deals for both local founders and investors.
If Spain produces more scaleups and its own growth funds, its domestic economy will retain greater wealth and value. Keeping more money within the country means more money will be available for future Spanish scaleups, continuing the self-propelling cycle of ecosystem development.
Lessons from Seasoned Founders around the World
To build the next Spanish scaleups, up-and-coming founders should learn from successful entrepreneurs who have “been there, done that” and grew their companies in more difficult markets.
Drawing on Endeavor’s global expertise in entrepreneurial ecosystem development, we gathered anecdotes and advice from seasoned entrepreneurs around the world who have navigated national crises, macroeconomic instability, and unfavorable market conditions. They made difficult decisions and successfully led their companies through unpredictable times. Their stories offer hope and inspiration to Spanish founders, who run their businesses under more favorable circumstances than these founders from Argentina, Greece, Indonesia, and Mexico.
Read through the stories in the interactive carousel below to learn from their experiences on different aspects of entrepreneurship, from raising capital to developing products. By adapting and applying these strategies to their own context, Spanish entrepreneurs can prepare their companies to make it through good and bad times.
Winning Strategies Spain Could Learn From
Spain’s entrepreneurial ecosystem is currently in a promising position and can generate high-growth companies. Although routes to exit are not appealing right now, the current downturn will pass. In the meantime, decision makers should institute policy reforms and programs to lay the groundwork for future exits and for large investments from institutional and corporate investors in Spanish VC.
France Enacted Major Policies to Support Entrepreneurs
The French entrepreneurial community and government set up supportive institutions and legal frameworks to benefit entrepreneurs, creating a thriving ecosystem that has experienced tremendous growth over the past decade. In 2012, French entrepreneurs and investors came together to form the advocacy group France Digitale, which represents their voice to policymakers. It now has thousands of members and works closely with the government, even having dedicated points of contact within the French Treasury.
The establishment of the public initiative La French Tech in 2013 was a major turning point. As a nationwide community for French entrepreneurs, it provides funding and support, connects founders to investors and other ecosystem actors, and serves as a platform for them to share best practices with each other. A public investment bank, Bpifrance, was also created in 2013 with billions of euros under its management, both to fund entrepreneurial companies directly and to invest in VC firms through a fund of funds. As a result, it has amplified the capacity of local VC firms and enabled them to take on larger rounds over time.
Legislative reform in France has benefited both investors and entrepreneurs in the country. In 2015, the government instituted reforms to create a more flexible investment structure, allowing limited partnerships (known as “SLPs”). Previously, this type of investment vehicle was not available locally, and investors would have to go through the UK or Luxembourg. The PACTE Law, which passed in 2019, simplified legal procedures for companies, lowered the tax burden on them, and reduced the cost of employee profit-sharing. Other policy reforms in France have included: giving tax credits for innovation; removing restrictions on employee stock ownership plans; and establishing a French tech visa to attract foreign founders, investors, and professionals.
La French Tech serves as the central coordinating body through which the public sector in France pursues a unified agenda around entrepreneurship. It has built a strong brand and messaging platform that positions France globally as an entrepreneurial nation, which was not the case prior to 2013. Through La French Tech, the government has an active policy to generate local unicorns, which they track as their success metric. In 2019, they set a goal of reaching 25 unicorns by 2025. The ecosystem reached that goal three years early in 2022, so a revised goal was implemented to reach 100 unicorns by 2030. France was also the only major European country whose entrepreneurial ecosystem raised more capital in 2022 than in 2021.
In many ways, the Spanish government can take inspiration from France in using government institutions, funding, and policy reforms to support local high-growth entrepreneurs. Spain’s first dedicated startup law was enacted in 2022, representing a step in the right direction. According to Jonathan Clarke, French Tech Madrid co-founder and OVHcloud Startup Program leader, “Spain has a lot of strong local tech hubs. The challenge is connecting them together and driving something centrally like French Tech. Even though French Tech is centralized and government-led, they were able to democratize it and build cohesion through local chapters.” With a more unified entrepreneurial agenda and local consensus, Spain can become the next breeding ground for unicorns in Europe.
In Latin America, Local Founders and VCs Stepped Up
Early entrepreneurial successes laid the foundation for Latin America’s ecosystem’s growth and maturity. The leadership of the region’s first wave of scaleups and the long-term vision of local investors have transferable lessons for Spain. Many companies from that first wave, such as Buscapé and Movile, were willing to do business with early-stage companies, giving the latter legitimacy and growth opportunities. The first wave of Latin American scaleups also contributed to a massive change in culture that became more accepting and celebratory of entrepreneurship. Top students used to seek careers in finance and investment banking, but over the past 10-20 years, there has been a growing trend of the brightest wanting to join or launch their own tech startups.
Several successful founders and c-suite executives have gone on to become local investors. Mercado Libre’s success led to the establishment of Kaszek Ventures by its former cofounder Hernán Kazah and former CFO Nicolás Szekasy. They were able to raise their first fund to invest in Brazilian and other Latin American companies thanks to their reputation as highly successful entrepreneurs. Initial LPs included their own colleagues and investors from Mercado Libre, as well as other LPs from abroad who had followed Mercado Libre’s huge success.
Although Kaszek began as an early-stage fund, deal flow allowed them to move up the ladder to larger rounds. The companies they invested in — especially the Brazilian fintech Nubank — did so well that they ran out of dry powder in their early-stage fund and raised their first later-stage ‘opportunity fund’. After their first fund, they have focused on raising funds from university and philanthropic endowments, with whom they had built long-lasting, trust-based relationships since the launch of Kaszek. From 2011 to 2021, the size of Kaszek’s funds has increased from \$100 million to nearly \$1 billion.
Strategic thinking on the part of Spain’s local investors, including founders-turned-funders, will enable the ecosystem to thrive in the long run. Latin American investors like Kaszek succeeded due to their reputations as leaders in entrepreneurship and their focused investment strategy. They were willing to invest in uncertain markets like Brazil and Argentina when others were not, while still only investing in reliable businesses with solid unit economics.
India’s Proactive Policies and VCs Propelled Its Ecosystem
The growing confidence and capacity of local VCs in India, along with forward-thinking policies, enabled them to fill in the gaps left by international investors. India — a continent-sized economy — has made significant progress building up the availability of growth capital in its entrepreneurial ecosystem. In the early and mid-2000s, local VC funds were managed by Indian returnees and remained early-stage focused. Later-stage rounds were dominated by large foreign investors like Tiger Global, especially after 2010. However, in 2015, when the Indian economy experienced some setbacks, many of those foreign investors left the market.
By that point, the initial pool of local fund managers was large enough to be able to establish their own growth-stage funds to fill the gap. They had the capacity to do this because they had more experience and more capital from their earlier investments in companies that had successful exits like Flipkart, redBus, and Citrus. These consistent exits also built a sense of confidence in the ecosystem that enabled investors to provide more capital to promising companies.
In the early stages of India’s ecosystem, several scaleups demonstrated resilience as they raised down rounds but ultimately emerged with more sustainable business models. E-commerce giant Flipkart raised its first down round in 2012. Its cofounder Sachin Bansal later remarked that the company should have done so even sooner, rather than delaying the round to try to secure a higher valuation. Both he and CEO Kalyan Krishnamurthy believe that Flipkart’s down rounds functioned as opportunities to rebuild a company’s cap table and ensure its long-term sustainability.
Policy reforms that improved the ease of starting a business and provided public funding for tech companies, as well as the rise in corporate partnerships and incubators, boosted the number of companies and amount of funding in the Indian market. These additional early-stage support systems also created space for VC investors to step into later stages. According to Sasha Mirchandani, founder of Kae Capital, “The government’s role has been a net positive. They have made an effort in many ways to help the venture ecosystem including starting a fund of funds, providing tax incentives, and speaking to stakeholders like us about regulatory reforms and other issues.”
In terms of the growth in the amount of capital managed by local VC firms, Mirchandani notes that the bulk of LP investment has come from “endowments, funds of funds, and large family offices — those are where the real money is. Indian VC has grown exponentially, though there is still a need for more growth capital given the size of the home market.” The combination of capital from this variety of sources, including the reinvestment of wealth made by prominent exited founders like Sachin Bansal and Binny Bansal of Flipkart, has allowed the Indian VC landscape to mature over time.
The Spanish venture ecosystem should prepare to be in a position where local investors can move up the ladder to participate in larger rounds, although it may not be at India’s stage yet. The Spanish government’s move to create a €4 billion Next-Tech Fund that invests in local VCs is a positive step in that direction. It will help Spanish investors participate in larger rounds than they otherwise could.
Comparison of Spain with Three More Mature Ecosystems
Number of Companies That Raised $10M+
Number of Unicorns Ever Produced
Number of $100M+ VC Investors
With the Right Moves, Spain Will Thrive
The experiences of other venture ecosystems show that Spain has the potential to reach maturity with more growth-stage funds and scaleup companies. If local founders, investors, and policymakers each play their part, the country’s ecosystem will thrive and grow larger. Spanish entrepreneurs should take inspiration from the experiences of founders who are building large, sustainable businesses in more difficult markets.
Local VCs should work to support the rise of more scaleups by entering deals at later stages, and policymakers should consider implementing reforms and a unified national agenda around entrepreneurship to create an enabling environment. When these elements finally converge, Spain will start ascending as a global hub for entrepreneurship.