The need for more pre-seed investment
Since LC Ventures was founded in 2014 it has become one of the most dynamic small venture capital entities in Portugal with a portfolio of 50+ companies. Founder Pedro Falcao says more consistent investment is needed at home to prevent successful new startups taking their ideas, talent and profits abroad.
Text and photos Chris Graeme
Any farmer will tell you that in order to reap a good harvest you need three things: fertile soil in which to plant your seeds and water and sunlight to grow.
When it comes to investing in budding new startups Portugal has proved to be fertile ground. It offers excellent IT and physical infrastructure, tax incentives (Tech Visa, Startup Visa and NHR regimes) for investment attraction and, of course, that one ingredient Portugal is never short of: a sunny and secure climate and enviable lifestyle which is a plus for any overseas professionals wanting to startup a business or relocate an existing one to the country.
What isn’t so good is the “water”, or in this case the sustained investment that so many small successful startups need and is either erratic or in short supply, forcing promising new companies in the Portuguese tech sector to move their headquarters overseas, usually to Dubai, the United States and, until Brexit cast its long shadow, the UK.
LC Ventures was started by four founding partners, Pedro Rocha Vieira, Pedro Falcao, Ricardo Marvão and Manuel Tanger – all Portuguese, in 2014 because: “brilliant teams are creating innovative products that don’t develop because of lack of funding.”
“The amount of venture capital and business angels investment in Portuguese startups is still small but it is relevant and growing,” says Partner Pedro Falcao who is an expert in the VC market in Portugal and was one of the keynote speakers at this year’s Lisbon Investment Summit dedicated to showcasing Portuguese startups and teaming them up with homegrown and overseas investors.
“If you compare VC investment in Northern Europe and the US, its much greater than in Southern Europe where typically the investment tickets are much lower. On the other hand, of course, this provides many more opportunities for the foreign investors which are now coming in,” he adds.
Falcao says that Portugal has a solid track-record for building valuable STEM and business talent, capable of developing now international companies like Farfetch, Outsystems, Feedzai and Unbabel, but that getting early investment at seed and pre-seed stages is not easy and with banks which traditionally lent money now largely out of the equation, tech startup entrepreneurs have to turn to private capital to support their growth.
“Portuguese investors suffer from a risk-averse investment profile, so entrepreneurs face a long and drawn out process of raising pre-seed (Angel) and seed capital (the riskier stages of financing) but don’t always get funding, so ideas don’t ever reach the prototype phase,” says Falcao.
Sow wide and diversify
One of the reasons why LC Ventures has been successful in such a short space of time is its diverse portfolio of 50+ startups in different areas, four of which have done exceptionally well and the others either showing promise or are now holding their own in the market.
“In the beginning we were focused on technology startups, but now we have broadened our reach to other startups” he says explaining that the VC sector is a “game of numbers”.
“If you have 20 startups, the probability of almost all of them failing is close to zero if you diversify and you’ll increase the probability that one success story will repay all the money you invested in the others,” he adds, pointing out that they don’t know which startups will fail and which will go on to be “rabbits” in VC jargon or Real Actual Businesses Building Information Technology.
Falcao says that private equity firms still have room to grow in Portugal where according to statistics from 2018: 65.7% of all financing was from self investment, 21.5% from banks, 2% from stocks and bonds, 1% from EU funding, 1.6% from the Government and 1% from private equity and that despite public investment being low (around 0.020%-0.040% on average since 2010), public incentives still play a relevant role in Portugal.
And while investment from Business Angels and Investment Vehicles is still relatively low in Portugal compared to other countries, these have grown in number from 267 (€43 million) in 2010 to 344 (€63 million) in 2018, while investment vehicles have grown from 56 to 64 over the same period.
In fact, in 2018 92 deals were made in startups by Business Angels involving a total investment of €11 million with an average ticket of €120,000 which represented a 40% increase on 2017. The numbers available so far for this year involve 70 deals, a €13 million investment in Portuguese startups with an average ticket of €184,000 and of which 57% and 44% respectively went to pre-seed stage companies.
Despite the difficulties of getting investment, the number of private equity firms in Portugal has actually increased, by twofold over the last 8 years.
When it comes to Venture Capital deals, there was a staggering 80% increase in the number of these in 2018 compared to 2017 from the major sector investors HCapital, EDP Ventures, Portugal Ventures, Vesalius Biocapital, Bright Ventures, Indico Capital Partners and Armilar Ventures.
In 2018 there were 56 deals involving €47 million of investment in Portuguese startups with an average ticket of €839,000 of which 41% of investment was at seed stage. So far in 2019 there have been 65 deals involving €69 million with an average ticket of €1.1 million of which 42% of all investment was at seed stage.
All these figures show just how relevant Portuguese startups have become when it comes to attracting both local and foreign VC investment.
“The leading companies that we have got that emerged from the startup sector such as Farfetch, Outsystems, Feedzai, Unbabel have done so precisely because we have respectable universities and research centres” explains Pedro Falcao.
“Another reason is the complicated business environment in Portugal with red tape and an economy suffering from a low purchasing power. Startups that successfully launch in Portugal face an easier time selling in more fluid environments and stronger economies like Germany, the UK, Australia and Holland, so success in Portugal is a good ‘boot camp’ to prepare companies for other larger markets overseas” he adds.
Where are the corporates?
Pedro Falcao says that another problem in Portugal is the lack of support from the corporates which, with the exception of the electricity giant EDP which has its own venture capital arm, are not participating as much as they should in investing in Portuguese startups.
By this he means companies listed on the stock market and some of the largest companies in Portugal.
Falcao says that these and some of the larger Medium Enterprises could and should participate in investing in startups but are shy to do so. One reason is that Portugal’s VC sector for startups started much later than elsewhere in Europe.
In fact, it was only in 2003 that a specific legislative framework was created for high-risk capital funds to be placed under the supervision and regulation of the Portuguese securities markets authority CMVM. Before, it was down to the Bank of Portugal. Even so, in terms of legal and fiscal frameworks, Falcao says that today Portugal is still slightly above the European average.
L C Venture success stories
Under the slogan ‘Spark-up a job connection,’ this startup uses algorithm matches to suggest the best of the available jobs based upon the candidates’ experience, interest and interactions on its platform.
Pedro Falcao says, “Landing Jobs were not doing even 50K per year when we started to invest and now, after 2.5 years, they have €2 million in revenue and a positive net profit. This is one that we are very proud of”.
Of the two founders, one was already 50 when he started the company. The other was 30. Falcao says that this shows that success can come at any age and when you have different founders with different experiences and backgrounds they complement each other.
A platform that links music producers with renowned orchestras/musicians with production costs 10% lower than mainstream studios. Musiversal won the prize for the ‘Best Startup’ during the Lisbon Investment Summit 2019. It brings together music producers and allows then to book studio time via the internet. Unique in the world, the startup is in the forefront of making the digital transformation of the recording studio business a reality.
Falcao says: “Imagine you are a composer and want to make a sound. You have to book a studio, get musicians, and a sound processor. They arrange all of that in 8 minute slots. Musiversal rents studio slots with a full service.”
The startup has grown fast. It has access to studios in Portugal and at London’s famous Abbey Road Studios and the service time is typically €299 Euros for 8 minute slots.
Musiversal has just completed its 3rd round and in less than 1 year LC Ventures has invested twice. One of this startup’s customers won a Grammy!