Startups struggling to find capital investment

Promising new startups have a hard time finding capital investment in Portugal to take their businesses to the next level. The country lacks a home-grown venture capital (VC) private industry. A lack of apetite for risk is only part of the problem, says Stephan Morais, Managing General Partner of Indico Capital Partners.

Portugal is one of the new “startup capitals” of Europe – a friendly, tax-efficient country brimming with tech and IT entrepreneurs who think out of the box and inhabit a mushrooming network of incubators and coworking centres in Lisbon, Porto and beyond.

That’s what you are led to believe if you read the international press, and in some measure it’s true. But look at the statistics for startup companies in Portugal and it’s noticeable that only nine out of 11 home-grown companies which have put themselves on the international map over the past decade had national capital at early stages.

Nevertheless, in the last seven years, Portugal has seen a tremendous evolution in its entrepreneurial and innovation ecosystem. International investors are starting to look at the Portuguese entrepreneurship and innovation landscape, with True Ventures, Union Square Ventures, Cisco Capital Partners, Notion Capital, Octopus Ventures, Atomico or e.ventures becoming involved in the national ecosystem.

In May, Porto-based apps startup Dashdash became the 11th Portugal-based company to get a Series A venture capital injection. But the money didn’t come from Portugal. In this case, it received US$8 million from US venture capital firm Accel, which also invested in Facebook and Spotify.

In spite of positive investment developments from overseas investors, currently there are few Portuguese startups that can find the capital to grow initially within Portugal. Stephan Morais, Managing General Partner at Indico Capital Partners in Lisbon, who is currently raising his VC fund, says that promising companies now have to look abroad for capital investment because “with the demise of Caixa Capital and Portugal Ventures, Portugal simply doesn’t have venture capital funds operating anymore”. The result? Most startups could leave Portugal and take their ideas, staff and expertise with them, leaving other countries to reap the benefits.

Venture Capital –  a specific market and asset class

Venture Capital is a very specific asset class. There is every chance for a startup to fly to London and present its company to top international investors. To be ready to do that, it often has to move the company to London, Paris, Berlin or Silicon Valley to get that seed or accelerator capital. If it wants to stay in Portugal to develop the initial stages of the company, it needs local capital.

“Good foreign investors, in our experience over several years of making many transactions, are not willing to come in with investment at the beginning of the journey. They prefer to invest, say a minimum of a million, into a company later on if it has already grown with local capital,” says Stephan Morais, himself a former CEO and entrepreneur with over 15 years of investment experience.

All ecosystems in Europe are focused on having great companies and entrepreneurs. That means proper technology transfer from universities, good incubators and accelerators and business angels, but, above all, local investors who are professional and have smart capital to help companies move to the next level.

“It’s not enough to throw money around, you need to focus and allow these local investors to have serious capital to enable these very young companies to reach a level where they can aspire to obtain more capital in a significant quantity,” he says.

“I always say this is the same work as the top football clubs do. You need to have the local clubs to train the young kids and when they get to a certain age, you present them to the champions league and a big club will pick them up. But Real Madrid is not going to come to Lisbon and pick up a 10-year-old!”

An unsophisticated market with a lack of investment funds

Stephan Morais believes that Portugal has not had an active venture capital market since mid-2016. “This is quite bad for the ecosystem.” To have local investment you need local investors investing in the local investment funds and this is another thing that is totally lacking in Portugal, contrary to all other countries in Europe, even in less promising tech markets and countries.

“Funds work on a committed capital basis. You find cornerstone investors for your fund and when you find investment opportunities, you call the capital. But you need to have investment funds. Funds work on management fees and that’s how you can put a team together that works on finding investment opportunities to help startups grow,” he explains.

“All funds – venture capital, private equity, pension funds, hedge funds, equity funds and bond funds – pay fees to a small team that looks for opportunities and, when things go well, there’s a profit share. That’s how it works. We need fund investors and these investors in Portugal almost don’t exist.”

In fact, it’s rare to find independent, home-grown venture capital investment companies and funds in Portugal. Caixa Capital, the venture capital arm of Portuguese bank Caixa Geral de Depósitos, was the only cornerstone venture capital investor in Portugal, which over a decade enabled the creation of many local private equity and some venture capital funds. But then it left the market in 2016.

The result, says Stephan Morais who was a board member at Caixa Capital, is that hardly anyone now invests in venture capital, not even 1% of their assets as in other countries. He thinks it’s because they don’t know the asset class and think it too risky, but aren’t sophisticated enough to understand this is an essential part of any investment strategy portfolio, to drive alpha performance.         

Risk aversion – a cultural problem?

“The issue in Portugal is that we’re risk-adverse. It’s a cultural issue that’s deeply embedded in our business psyche and it’s particularly difficult, for example, for foreign investors. They simply don’t understand why Portuguese entities don’t move forward with a solution that seems good for all parties when they are here for business,” says Stephan Morais who has seen, first-hand, the pro-active attitude to risk capital in countries like the United States, Germany, France and the United Kingdom.

Morais says it’s not about being Portuguese. It’s about the “system” in Portugal where large companies and financial entities are wary of taking risks and make decisions in case they offend or upset one person or another. And when they do, it’s sometimes more based on personal connections and long relationships rather than project merit, with often bad results.

“There are so many Portuguese global personalities in business, sports, banking, company management and arts who excel outside Portugal in a different environment and system where they are not constrained and hampered by rigid hierarchies, red tape and fear of initiative and decision-making. My worry is that a change of guard in the top companies and government just isn’t happening fast enough to keep up with the rest of the world.”

Macron’s France – a shinning example

Stephan Morais thinks Portugal has a problem with the way society works. It lacks dissent. “I don’t think you need dissent in the Israeli or United States extent, which can come across as aggressive, but I certainly don’t see this lack of dissent and fear of questioning in France or the United Kingdom, for example” he says.

“I’ve lived twice in France and was puzzled because it’s not an obvious example. Despite all the problems France may have, why has it consistently maintained its individual, creative and leading position among the top nations of the world? Because the best rise to the top, regardless of their background or family name. They select the cream of the crop for the best universities and the best from these are hired by top companies and the government. That doesn’t happen in Portugal where generally a family name or connection speaks louder than individual merit and excellence,” he adds.

Another specific issue in venture investing is corporates and family offices that think they can invest in startups on their own without having the necessary expertise or experience in this asset class. “This is a very complicated asset and what should happen, as in Spain and any other country in Europe, is that these corporations and family offices should invest in independent funds managed by dedicated professionals like us at Indico who know how to study an investment opportunity and have experience at cherry-picking winners in the Portuguese startups field. It will take time for them to understand that it is no coincidence that their peers abroad work mostly this way.”

But despite the risk-adverse climate, Stephan Morais believes there are clearly enough investable companies in Portugal for a professional investment industry. Is it active now? “No, not really and that means a lot of promising new companies are not getting the initial funding they need to develop, let alone grow. That’s not good for the economy and it’s not good for Portugal,” he concludes.

Indico Capital Partners

Indico Capital Partners, currently raising its fund mostly abroad, is one of the leading venture capital firms in Portugal supporting the best high-tech companies going from local to global. Indico focuses on blockchain, artificial intelligence, software as a service, internet of things, fintech, cybersecurity and digital companies, targeting investments at Seed to Series A level (€200,000 to €5 million per company). Together with Ricardo Torgal (General Partner) who has investment experience in multiple environments, including backing the most prominent Portuguese startups, and Cristina Fonseca (Venture Partner), Talkdesk founder, Indico Capital Partners is the first institutional independent venture capital fund in Portugal aiming to select the best tech startups and help them scale.