This article originally appeared in Novobrief, a partner publication from ESPACIO.
The global economy may have taken a hit in 2022, but investment in Spanish startups reached a record high. The Spanish and Portuguese startup ecosystem has experienced steady growth in recent years, with a total of 15 unicorns across the two nations, including Spain’s latest addition, Factorial. But what will 2023 bring for tech innovation in the Iberian peninsula?
To find out, Novobrief sat down with Tomás Penaguião, Partner at Bynd Venture Capital – a Portuguese venture capital management company working exclusively with startups with direct ties to Spain or Portugal.
Although we may not see new records broken in 2023, “we do not foresee a slowdown in investment. This is especially true for early-stage startups,” Penaguião begins. “Although investors will look to invest in less capital-intensive businesses with a shorter path to profitability.”
The evolution of the ecosystem over the next year will depend on a number of macroeconomic factors, but Penaguião remains optimistic about the direction it’s headed in. “The foundations for the creation of successful startups are in place and there is liquidity on the investment side thanks to funds raised in previous years,” he points out.
The new Startups Law: a win for the tech ecosystem
One of the foundations currently being laid is the new Spanish Startups Law, also known as the Law for the Promotion of the Emerging Companies Ecosystem, which will come into force in 2023. Its recent approval has been celebrated as an opportunity to “allow our startups to be even more competitive when it comes to attracting talent and international investment,” according to Carlos Mateo, president of the Spanish Startup Association.
The introduction of this law will indeed prove beneficial to all actors in the startup ecosystem: entrepreneurs, employees, and investors alike. “Entrepreneurs will benefit in terms of taxation in the first years of activity. They will be able to defer tax payments and will be able to create a treasury stock of up to 20% of shares with the aim of attracting talent,” Penaguião explains.
Employees will have access to new regulated stock option plans, which will allow them to acquire shares in the company’s stock free of charge or below market price. Investors will also see attractive tax benefits, such as a 50% tax deduction on investments of up to €100,000 per year by business angels, and a 50% exemption of carried interest for venture capital funds.
While these changes promise a number of advantages across the ecosystem as a whole, “they should not be considered a solution to all ills,” Penaguião warns. “There are still several points to be improved, such as the limitation of four startups created in the definition of a startup, or all the associated bureaucracy to access these benefits.”
Trends to watch in 2023
Which emerging technologies will see the most growth in the Spanish innovation ecosystem in 2023? According to Penaguião, two sectors will shine above the rest. Firstly, blockchain applied to different use cases, such as digital identity, online payments, and the tracking of supply chains. Secondly, technology that promotes sustainable development – also known as “climate tech – which ranges from alternatives to animal protein, to software for tracking carbon footprint and the digitization of access to solar energy.
He predicts that the sectors that will attract the most attention from venture capital firms in 2023 will be cybersecurity, owing to “the growth of threats and the strong impact on the reputation and business of companies”, and web3 and blockchain, where “more and more technology-based projects and disruptive business models are starting to emerge.”
Tips for entrepreneurs seeking funding
Despite changes in tech trends and macroeconomic circumstances, some things will remain the same in 2023. “Investors will continue to look at potential investments in their different dimensions: quality of the management team, product innovation, market size and trends, validation metrics, and investment opportunity,” Penaguião points out. “However, given the current macroeconomic conditions, the financial management capacity of the teams, the definition of a profitable and traction testing of the product developed takes on additional weight in any investment decision.”
He would advise startups seeking financing in 2023 to structure their capital raising strategy as a commercial process. “Identify several potential investors and define how you are going to contact them,” he says. From here, “make sure you have a clear presentation of data to share with investors, as well as a business plan justifying how you are going to channel the investment and the results you want to achieve”, concludes.
Disclosure: This article mentions a client of an Espacio portfolio company.