Portuguese tech startup market is “nothing more than a pilot” says VC fund manager

Text & Photo: Chris Graeme

Portugal’s technology startup market is too small to be anything more than a pilot according to Pedro Ribeiro Santos of Armilar Venture Partners who spoke at the VNTR Global Investment Summit in Lisbon on Wednesday.

Pedro Ribeiro Santos, Managing Partner at Armilar Venture Partners, a fund-based VC in Lisbon with 24 years in the market – the first to do venture investment in the country, said on the panel ‘Investing in Portugal’: “We have benefited counterintuitively from being a small country in the sense that there is no Portuguese market; there is no such thing, it’s too small.

At best the market is a pilot and as a pilot it is a good one; the infrastructure is good, most people speak English, digital literacy is also good, but it’s nothing more than a pilot”.

The founder of the VC, whose ethos has always been around doing early-stage investments in companies with a high technology content and backbone across a range of industries as a generalist investor, stressed that there were factors that made Portugal attractive.

“Historically, we have very strong engineering and science schools and there is a lot of highly qualified technical talent” he revealed.

Santos recalled that everything started to change in the Portuguese ecosystem in terms of being active with the huge wave of young, very technically talented people wanting to create startups with a product, and the fact that they came from a technical background in a small market meant that they wanted to create a global and differentiated products that could be saleable anywhere in the world.

This DNA within the Portuguese system, he explained, had emerged from technical founders creating products that become global, and this had been favourable to the development of the Portuguese ecosystem.

Santos pointed out that the most successful Portuguese companies today have that background.

“Most of the companies that we have had in our portfolio, such as low-code company Outsystems or real estate tech Casafari, came from science and R&D, except in the case of Feedzai, an AI driven anti-fraud and financial crime tech company, which came from academia”, he said.

Portuguese startups – weak on marketing and sales

But where does the Portuguese market stand in terms of its capacity to generate global competitive tech startups and what are the key factors that make Portugal attractive and what are its key challenges for startup companies?

Fintech expert Mike Sigal, who has lived in Portugal for two-and-a-half years and worked in Silicon Valley for 35 years, and is now a coach to both founders and emerging fund managers around the world, working with seven different funds, said that there was a lot of great technical talent in Portugal but Portugal was still weak on the commercial side.

“One thing that I have noticed in Portugal is that like many small markets, unfortunately many of the universities tend to hold on to what they believe is their domain very tightly.

If you were to look at Stamford University, all of the great companies tend to come from the engineering disciplines, not out of Stamford Business, whereas some of the business schools here think that entrepreneurship and innovation is in their domain”, he said.

And added: “I’ve started teaching team entrepreneurship and venture capital at some of the technical universities and that’s been positive because you see the engineers’ minds begin to grapple with the mechanics of building a business.”

Sigal believed that Portugal was at an interesting inflection point between the current existing talent and the talent coming in as a result of immigration.

“The other thing that is interesting, and is a result of the recent US elections, is that I have been getting calls from US colleagues who want to escape, and have been asking how they can make Portugal a domicile for global investing. The idea of more experienced VCs based here and investing from here could materially change the dynamic and trajectory of the Portuguese ecosystem and make a big difference,” he opined.

B2B rather than B2C

Stephan Morais, whose VC Indico Capital Partners has around €220 million under management and 49 startup companies that have raised around €2Bn over the past five years since the EIF invested in its first institutional fund, explained how Indico had been primarily focused on engineering because “10 years ago there had been the emergence of entrepreneurs that had an engineering background and they wanted to become the new ‘Mark Zuckerberg’”.

Over the past decade the team at Indico has invested in six unicorns. The company has invested in Southern Europe and the Portuguese Diaspora with capital of up to €10 million per company.

“What we see is that in Portugal you continue to see the strength of the B2B business model because the fact that we’re not a big country is not very enticing for B2C, although some of the success stories were in B2C and we continue to invest in B2C operations as well”.

Portugal, he said, had also been very strong in biotech and diagnostics with lots of companies in diagnostic and medical devices.

Another area in which Portugal is beginning to flex its muscles is the Blue Economy and here Indico has a closed venture capital fund called Indico Blue Fund with €54 million for early stage ICT startups.

“We also have start-ups in renewables, new materials and specialised agriculture which derive from the excellent scientific backgrounds of some of their founders”, he added.

However, Stephan Morais pointed out that whilst founders from engineering backgrounds tended to get the entrepreneurship game and understand what VCs do, when founders came from a scientific background it was sometimes harder for them to grasp it and know how to negotiate and progress.

But is there a real opportunity for Portugal to be an investment destination in the Blue Economy and what is Portugal really special at in all of these respects?

The answer according to Morais is that “we are really special in that we have a small market, and that people know how to speak English quite well, and this propels people to go global from day one.

“We also cover other markets such as Spain and Italy, and these countries are big enough for these companies to acquire customers in their own markets.

“But if you look at the profile of Spanish unicorns versus Portuguese ones – and we had more unicorns than Spain until recently – Spain is more B2C and we are more B2B. The big difference is that Portugal’s unicorns are much larger than Spain’s and the reason is that the Portuguese look to the US to grow, whereas the Spanish unicorns stay in Spain and then expand to South America.”

Mike Sigal, who is a seven time founder with a several exits, one through an IPO before becoming an early fintech VC investing in over 80 companies in 26 countries over 28 months in a 17 export portfolio, was of the opinion that talent that has been missing until relatively recently was marketing and sales which was a challenge for the ecosystem.

“The labour force has changed for the positive with more and more skillsets in building that part of the business with a lot of inbound immigration talent from outside technical areas that brings that experience. What had been a very strong challenge has been mitigated over time,” he said.

On the capital side of the industry, capital has historically been very scarce in Portugal and has continued to be a challenge.

Sigal said that his understanding was that there had been a significant inflow of international capital, and VCs that were very interested in what was going on in the startup ecosystem in Portugal and in these companies that were highly successful that they had never heard of, and realising capital was scarce, were interested in investing.

Portugal’s evolution “worth celebrating”

David Gonzalez Martin, the European Investment Fund’s representative for Spain and Portugal, said the news on the evolution of the market in Portugal was “very positive and worth celebrating” with a number of fully consolidated Portuguese startup teams in the European league, attracting international investors and increasing their size potential.

The EIF had just announced at Web Summit a €90 million investment package in three Portuguese venture capital funds – Armilar Venture Partners IV, Faber Tech III and 33N Cybersecurity and Infrastructure Software Fund, enabling more than €400 million of capital for technology startups to be potentially matched with funds from the private sector.

“Years ago we were investing in first-time funds and emerging teams and now the EIF is focusing on new teams and emerging managers and tech funds, so we are aiming at consolidating the base of fund managers and increasing them,” he said.

Martin believes that in terms of development funding, Portugal is a key market for the EIF with a number of partnerships established with the Portuguese development bank Banco do Fomento over the past two years, which has allowed it to support VCs with an ambition to maintain that level of funding and partnerships. “The news is positive and we are here to stay and support the ecosystem with budgets from Brussels and national budgets.”