Portugal’s small but growing Venture Capital market

 

It is a buoyant time now for Portugal’s small venture capital segment of the equity market. With banks offering zero interest, investors are looking to higher returns in the venture capital market.

Text: Chris Graeme

Until the recent pandemic, the Portuguese economy had been one of the most dynamic in Europe, and this helped fuel interest in Portuguese venture capital (VC) funds.

Despite predictions of venture funding slowing down due to Covid-19, high-net-worth individuals (HNWI) and institutional investors are continuing to look for new opportunities to invest in venture capital funds, who in turn invest in start-ups and small to medium-sized companies in exchange for equity.
For starters, the US and Euro Zone economies are awash with cash that needs to be invested, thanks to the amount of quantitative easing and recovery funding that is coming out of the European Central Bank and the Federal Reserve.
According to the Private Equity Activity Report 2007-2020 for Europe, the amount of money in euros invested in all Portuguese private equity firms went from €453,883 million in 2007 (the year when the financial collapse began in the US) to €461,346 million in 2019 (a boom year for Portugal) and fell back to €72,643 million last year.
Of this total, €166 million was allocated to venture capital funds in 2019, but only €50 million in 2020.
Most of the funding came from within Europe (€127 million in 2019 and €42 million in 2020, while the domestic market was responsible for €38 million and €33 million respectively). Investment from the US, according to the same source stood at 0 from 2007 until 2019, with €43 million and €17 million in 2020.
France and the Benelux countries were responsible for €86,532 million in 2019, but only €8,5 million in 2020. From Southern Europe came €38 million in 2019, falling back to €33 million last year. Total all-stage venture capital from around the world went from €94 million in 2019 to €45 million to €54 million in 2020.
The money was used to feed 53 startups in 2019 and 41 startups in 2020 by 78 venture capital companies, of which only a smattering, like Indico, have any substantial investment funds.
Stephan Morais is one of the managing partners of Indico Capital Partners who, together with Cristina Fonseca, co-founder of Talkdesk, and Ricardo Torgal, started the VC in 2017 (pictured).

Modest beginnings

Morais and Torgal had left Caixa Capital, a fund belonging to State bank Caixa Geral de Depósitos, in July 2017 to launch what was to be the first private and independent early-stage VC fund in Portugal. Within two years it had garnered €54 million to invest in mostly Portuguese technology startups.
At that time, there were around a dozen Portuguese companies that had successfully raised capital overseas, mostly in Europe and the US, including one that achieved “unicorn” status, the British-Portuguese Farfetch (an online luxury retail platform). Others followed suit, such as Cristina Fonseca´s Talkdesk (a cloud contact-centre solution), OutSystems (a low-code tech company), and the latest Feedzai, which provides e-commerce and banking anti-fraud solutions and which this year raised US$200 million.
Morais says that between 2016 and 2018, there was a slowdown in available investment capital because there were no VCs of any relevant size in the Portuguese market to invest in promising Portuguese startups.
That did not mean, however, that there was a lack of startups looking for development or growth capital. In fact, there were nearly 1000, but had to look for capital elsewhere, such as Paris, London or in the US, mostly with dim results given their early-stage nature – a market that is mostly local.
By the end of 2019, the fund had invested part of its €54 million in a number of Portuguese startups, including pet food delivery company Barkyn, which went on to secure €1.7 million led by Indico and recently completed its €8 million Series A from the VC and several international investors.
Indico subsequently launched a €12 million pre-seed fund to invest in startups jointly selected for a new Lisbon-based accelerator in partnership with Google for startups. The fund today has €66 million of capital under management, of which it has invested €30 million in 22 companies, and these companies have raised over €680 million with other investors worldwide – from sovereign wealth funds to major European and Silicon Valley powerhouses.
Last year, Indico´s only non-Portuguese company, TIER, raised US$250 million Series C funding led by Softbank, and already this year, Anchorage, the first crypto bank to be granted a Federal Charter in the US, raised an US$80 million Series C led by GIC, the sovereign wealth fund of Singapore, both companies becoming star performers in the Indico portfolio.
Today, Morais and Torgal manage the most internationally recognised venture capital fund in Portugal. Morais says that although the Portuguese VC market is a small one, it has quality and has definitely continued to grow inline with the European and international market, even in the pandemic year.

Low interest rates spur investment shift

In fact, overall, both the valuations and amount of applied capital is at an all-time high globally. The Chinese market is particularly large and growing fast because it has such huge companies and is now the second largest following the US.
Morais says that one reason why so much money is being applied to VC funds are the low interest rates offered by banks and the poor returns on sovereign bonds, a phenomena which has persisted for such a long period of time, with even negative interest rates being offered in some cases.
“If you are an asset manager, fund or simply have money to invest as a private family office, you cannot afford to let the money sit in a bank account because it is losing money by being eaten up by bank charges.
“Investors are putting their money into other asset classes because they offer higher returns, and this is why there is a shift of capital to the private equity markets in general and the VC market in particular, and partly helps explain why the sector is growing,” says Stephan Morais.
Morais explains that when the industry grows, venture capital funds like Indico have more capital under management to deploy to companies. With more competitors, there is more competition for deals and prices will go up, which explains the current high valuations.
The Indico founder says that, while it is now essentially a low interest rate issue, the growth of the VC funds markets is also a by-product of expansionary monetary policy by the US and EU central banks (with a lot of quantitative easing), and the growth in the high technology companies in areas such as AI and cloud-based services. More money has developed technology, and then more technology requires more money to grow within the context of a 13-year period marked by government expansionist policies.

From strength to strength

Of the successes this year, in addition to Anchorage´s US$80 million raise in February, mental wellness platform Zenklub raised a €7 million in Series A, focusing on the huge Brazilian market.
In Portugal, a small market, the number of VC companies has risen from 62 in 2007, climbing to 75 in 2019 and 78 in 2020. However, only a few if these are of any great significance. “The number of VCs in Portugal is growing, and the average portfolio size in terms of amount of investment is growing too. But there are only a handful of sizeable VCs and these are bigger than what they used to be,” says Morais.
The managers with significant investment capital are Indico Capital Partners and Armilar Venture Partners, both independent, and state-owned Portugal Ventures.
Smaller VCs like Shilling, Faber, Bynd and Mustard Seed MAZE (MSM) also regularly participate in rounds, as do increasingly private equity player Iberis and corporate venture Semapa Next, and long-term investors EDP Ventures. Other players are less relevant, given their smaller size.

Google for Startups

Indico Capital Partners has recently announced the 2021 edition of its acceleration and investment programme for young startups in partnership with Google for Startups.
A total of 11 startups who were looking for their first round of investment from institutional investors have by now joined Indico´s pre-seed programme.
This year’s programme was presented with Cristina Fonseca, with the aim of encouraging startups that were ready to launch onto the market to apply for Indico’s €100,000 investment. The 12-month pre-seed programme includes mentoring presentations from founders and successful international investors, presentations from ecosystem partners, and support in attracting funds and talent.
All of the companies on the programme quickly raise additional capital after having received the upfront investment as part of the programme.
“The investment aims to encourage a greater creation of startups and offer projection to the most promising ones in order to help them go international and take advantage of greater investment opportunities, such as access to more finance from Indico, which could be anything up to €5 million per company,” says Stephan Morais.
Indico Capital Partners established the partnership with Google and launched the pre-seed investment programme with Google for Startups in 2020. Some 140 startups in Portugal applied for the programme, and seven were selected to become part of Indico’s portfolio, each one receiving €100,000 investment. This year, over 170 have applied and the first four have already been selected.

Future prospects

Despite the Covid-19 pandemic, because of low interest rates and a highly expansionist central bank policy, there will continue to be money available for investment in asset classes like venture capital applied to promising new startups and dynamic growing small technology companies needing liquidity to expand.
Portugal is likely to continue to produce an increasing quantity of quality innovative technology startups, particularly once the pandemic passes.
Of course, the more money there is in the system, the more money funds – VCs included – will have to invest in companies that need finance, but there is always a fine line between the amount of available capital and the number of companies that will get investment. Indico has evaluated close to 2000 companies to choose only 21, a mere 1% chance of being invested.
Too much capital can cause bubbles, too little capital, as had been the case in 2016-2018, when there were good companies that couldn’t access growth capital, and leads to stagnation.
With the release of so much liquidity in a market, the venture capital sector in Portugal is likely to enjoy good times ahead, at least until 2025-6.

 

Successful Indico startups

Anchorage is the most advanced and secure crypto digital asset platform for institutions.
Barkyn is a subscription for pets offering food, goodies, vet support and personalised care, all in one.

Unbabel is building the Internet´s translation layer, using artificial intelligence to support multilingual customer service for global giants.

Bizay is building a world-leading tech-based B2B marketplace driven by disruptive supply
chain technology.

eatTasty uses under-utilised kitchen space for outsourcing the production of its daily lunch menus for hyperlocal delivery.

TIER Mobility is a micro-mobility operator that aims to provide sustainable, ride-sharing solutions to its customers.