Portuguese startups could find investment environment more challenging

Portugal is now the 6th most important startup hub in Europe according to the FT, but there were signs last year that it is becoming increasingly more difficult to get venture capital funding than it was seven years ago.

Around the time of Web Summit in November 2023, the Executive Director of Startup Portugal, António Dias Martins had warned that 2023 had been “challenging” for startup founders in Portugal.

He said that venture capital investment in Portugal had plummeted by 50% compared to 2022, reflecting a global trend and growing international competition to attract investment and talent, with Portugal facing tough competition from countries like Spain, France, and the UK.

And now this feeling has been backed up by data from PitchBook, a financial data and software company with offices in London, New York, San Francisco and Seattle. Serving clients in 19 languages, which provides thousands of global business professionals with comprehensive data on the private and public markets.

PitchBook says that at a global level, the amount of VC investment capital has fallen to €70.09Bn, a significant sum worldwide, you would think, but it is the lowest amount of global investment since 2017, meaning that with less money around, only the most competitive, innovative startups and scaleups with the best ideas and business plans net the best investments.

Reports Negócios, after an extraordinary year in 2021 – influenced by the cash injections from the EU and EU Member-State governments during the pandemic – the technology sector is seeing a correction.

Data from PitchBook reveals the first quarter of 2024 being the weakest ever in terms of investment since a peak in 2021.

Cautious optimism

The slowdown in investment is being described as “cautious optimism” for 2024. “Optimism is an essential factor in entrepreneurialism, and one quarter is unlikely to change that, but the first quarter of the year have highlighted some failures”, says Kyle Stanford, a VC analyst for PitchBook who adds that he is on the side of the optimists who believe that 2024 will be better than 2023.

However, he says that it is important to have a realistic approach when it comes to expectations for 2024. 

That said, the total amount of investment worldwide is not the only indicator that shows a flagging performance in the sector. The value of exits – meaning the total amount of listings of such companies on stock markets and company sales – when investors can recoup their money, has also fallen to the lowest amount since 2016.

Data from PitchBook shows that in Q1 there was a total of 559 exits worldwide, worth US$30.7Bn and in this segment, 2023 was a bad year with 2,801 exits worth US$234.3Bn – a seven year low.

70% of Portuguese startups created in the last 5 years

According to Startup Portugal’s Startup & Entrepreneurial Ecosystem Report for 2023, there are 4,073 startups in Portugal that, together, generate €2.3Bn in turnover and €1.3Bn in exports, accounting for approximately 25,000 jobs. What’s more, 75% of the startups studied have no risk of bankruptcy, a clear sign of the resilience of the Portuguese ecosystem.

Since the beginning of the last decade, the creation of startups has grown every year in Portugal  with the exception of 2020. This growth has been intensifying, and 70% of the total current startups were created in the last 5 years, with 2021 and 2022 reaching the highest levels in startup creation, with 600 and 706, respectively. Another key takeaway is that the average salary of startup employees is 37% higher than that of other Portuguese companies.

Investment in R&D in Portugal increased by 19% compared to 2022, in a universe where 84% of startups are high-tech knowledge-intensive service companies. In terms of sectors, the majority of startups (3,278) belong to the Information and Communication Technologies, accounting for 61% of the total turnover of startups. Despite being significantly fewer, startups in the industrial sector represent a significant turnover of 26%.

That said, challenging geopolitical headwinds, high interest rates, inflation, increased costs, is putting an end to cheap investment money and getting VC funding is tougher.

The amount of VC investment in European startups and scaleups fell 66% in Q1 2023, with higher costs for founders eroding business advantage with an overall fall of investment of around 50% for 2023.