As far as I can tell, a tech startup is a company that started up recently. These whippersnappers operate digitally, have a potential for growth and tend to be doing something new. They’re part of an industry that’s making serious waves, and Barcelona’s currently working out how to surf them. Few people entertain the illusion that the scene here is overtaking London – let alone Silicon Valley – but last year, Spanish tech startups attracted over half a billion euros of investment. Sixty per cent of these startups were from Barcelona so it’s time to take the scene seriously.
BARCELONA ON THE MAP
In 2006, the Mobile World Congress (MWC) moved to Barcelona. For a week in February, the city becomes the centre of mobile technology. The MWC didn’t start the local scene, but it put Barcelona on the map. Nowadays, 100,000 people (including the likes of Mark Zuckerberg) come to talk tech. It is, unsurprisingly, dominated by the US and China but 48 of this year’s exhibitors were Spanish, more than any other European country. They have a home advantage but that shouldn’t undermine the achievement.
THE LOCAL ECOSYSTEM
The Catalan ecosystem’s most common startups (26.2%) focus on e-commerce, especially in mobile classifieds, and/or mobile technology. Wallapop intersects these categories. The Barcelona-born mobile classifieds app was launched by six guys in 2013. In three months, it had one million users.
I met with Agus Gómez, the company’s co-founder and CEO who put their success down to two main tenets: “be original” and “go big or go home.” A lot of copycats have wasted money taking business models from abroad, operating them less well, and completely flopping. Internet classifieds is one of the most profitable and well-trodden paths around, but Wallapop was the first to focus entirely on mobile. They’re now the best-known classifieds app in Spain.
Barcelona’s low costs are a big draw for foreign companies. Silicon Valley’s giants can set up a European base here for less than half the cost of what it might be in London. Cheap talent, nurtured by fantastic business schools (IESE and ESADE), design schools (IED and BAU), engineering schools (UBC) and democratic online tech education, has already convinced Ocado and Amazon to move big projects here. Uber’s planning a big data centre for the city, and it’s not even allowed to run its cabs here.
This is all new. After 2008, talent traffic was mostly outward, says Dutchman Claude Loeffen, who set up Nederlia, a startup specialising in tech recruitment for the likes of Spotify, eDreams and Booking.com. Initially, if they worked with Spanish people at all, it was to take them abroad. Nowadays, the brain drain is slowing and even turning around. Half the Spaniards they speak to are returning and half their clients are from here too.
And money is joining them. The European Cities and Regions of the Future 2016/17 report by the Financial Times’ fDi Magazine, called Barcelona’s strategies for attracting foreign investment the best in the world. This is paying off, with a 134% increase in startup investment from the year before, most of which has come from more mature ecosystems; it’s a good indicator of how appealing Barcelona is becoming.
Wallapop shows, however, that Barcelona isn’t destined to just be the outpost of San Francisco and London, even though much of their investment is foreign. This year, they merged with fellow trading app LetGo, the only Catalan startup to have beaten them on investment in 2015. It is now a genuine rival to American counterpart OfferUp, an incredible feat for a company in such a comparatively tiny market.
Wallapop always intended taking on America. American investors gave them invaluable expertise and the confidence of a more developed ecosystem. Agus says they chose to launch in France and Britain first to “remove this ‘Spanish company’ label that hangs round our necks.” Their competitiveness is a result of their genuinely innovative business model, something that translates anywhere. It offered an innovative and profitable product, not just cheaper offices and developers than San Francisco.
Form design specialist Typeform was born a year before Wallapop. Robert Muñoz, its unassuming, calm-voiced 30-something founder met me at the Barception, which is exactly what you think it is, with herbal tea or Moritz on tap. Typeform has also risen off the back of its unique model and its determination to take the product beyond Spain. Now, American big guns – Apple, Nike, AirB&B, and Uber – are coming here to use its services.
Both companies borrowed lessons from abroad, through investors, an international workforce and even from founders. David Okuniev from Belgium, who co-founded Typeform, “was educated in London. London is much more advanced than Barcelona. Barcelona is really good at general design, from architecture to posters for walls and graphic design but not so much with user interface.”
The scene’s relatively small size and young age forces it to take foreign money and learn from foreign examples. “There are very few companies that have achieved a huge scale here and so there are very few people who have made this journey,” Muñoz told me. But they are making that journey now and the effect of their hard-learned lessons are already percolating through the city. “I think we need time,” he continues. “I was talking to somebody who went to San Francisco to work for Google… after five years there he said ‘Wow! The change I have seen here in Barcelona.’” These changes are not necessarily quantifiable, but Agus and Robert are proponents of an internationally-minded and ambitious approach to business, developing products that are affecting how the rest of the world does things.
A LOT OF MONEY COMING IN BLOODY FAST
The administration is always slow to cotton on. A big critic is Luis Cabiedes, one of the country’s most successful startup investors. Originally from Madrid, he speaks about Barcelona with pride. He replies to my e-mails like lightning, more than I can say for any other Spanish source, and is outspoken, eccentric and a lot of fun. “To skip false modesty, I have the best track record investing in startups in Spain by some margin and am the only person in this country to have ridden a unicorn,” he tells me over a coffee just off Passeig de Gracia. In 2014 alone, Cabiedes made a 57-fold return from his investment in Trovit, another hefty profit from Ducksboard and that unicorn he rode was BlaBlaCar.
He pulls no punches when speaking about the government, local and national. “These people have never ever worked for a company,” he laments. “Never created one single job. There are a lot of parasites and that’s very, very Spanish.” Self-preservation and pointless bureaucracy make changing this a difficult task.
The administration’s early treatment of Typeform indicates how out of touch they can be. Early on, after attracting his first investment, Robert went to ENISA, the Spanish government’s entrepreneurial investment fund. “They didn’t understand the idea. If you want to assess technical projects you need to have the right people there,” he says. “Otherwise, they will only invest in things they know will work and it’ll never be the next big thing.” A sentiment echoed by all I met.
Last year, FOND-ICO, Spain’s fund of funds, put 1.5 billion euros into the pockets of venture capitalists to invest in startups. Investors more used to pre-mobile tech market also began to take notice. A lot of money came in bloody fast, leading to over-valuation and badly-planned spending. Cabiedes spits when talking about FOND-ICO’s effect on the market. According to him, they sailed exceptionally close to “corruption: giving money to their cronies and friends.” This idea is shared by others who didn’t want to go on record.
THE LANDING PROBLEM
I’m ashamed to say it, but one of the first companies I turned to for help here was AirBnB Spain. Entering their offices felt like a betrayal but, despite my wariness, they were extremely accommodating.
Angel Mesado, head of public policy and ex-civil servant (cue eyebrow raise), told me, “The man on the street would say Activa is the best thing the ajuntament has done for business of any kind in the city.” One of the oldest incubators in Iberia, the state-run institution offers free advice to companies big and small. It is connected to state and private initiatives in the city with expertise on business development and the local business climate. Obviously, the fount of all knowledge.
Not quite. The misspelling of ‘business’ in the title of Activa’s international business promotion webpage was a sign of things to come. Four months, over 20 emails, countless phone calls and broken web links, a visit to their offices and a host of false promises later and I am yet to meet any representative of Activa. Hardly convincing, but King.com, AirBnB and Tech City all noted their helpfulness.
And help they need. Angel at AirBnB noted that “a significant number of companies activated by local government fail because of local regulations.” Entrepreneurs have no shortage of counterproductive laws to contend with. For example:
Personal income tax is one of the highest in Europe, creating a shadow economy that could represent as much as 4 million jobs’ worth of uncollected tax.
The tax system is so complicated that many register their businesses abroad, even if they might want to pay taxes here.
There is a lack of a clear approach to taxation on financial technology so fintech startups like Kantox, which are run from Spain, register themselves in London.
Employees have to pay 40-45% tax on any stock options upon purchase, based on potential and precarious future earnings. As one of the few ways a startup can compensate employees when it doesn’t have much in the way of real money, stock options can be vital early on. This is a big kick while they’re down.
Any entrepreneur who wants to move their personal tax residence outside of the EU has to pay an “exit tax” if they have been paying taxes in Spain for 10 of the past 15 years and either hold more than 25% of a company worth over €1 million or hold a stake worth at least €4 million in a company. They would have to pay an as-yet unrealised capital gains tax associated with the individual’s move, gains that are at a high risk of never being realised given the volatile nature of startups. Given that companies that want to grow will often want to move eventually to more fertile grounds, this is likely to put people off starting a company here in the first place. The founder of Jazztel puts it best: “Why would anyone start a company in Spain and be forced to pay phantom profits in case they want to leave when there are great alternatives, such as the UK, which offer freedom of movement?”
These hits might not knock out an entrepreneur worth his or her salt but there’s no doubt that they stall plenty of low-level economic activity, keep fledgling business people from joining the fray and, finally, prevent the state from benefitting.
Businesses are joining forces, often with the help of the administration, in groups like Eurecat and Barcelona Tech City which are too loud and focused to be ignored. Based on incubators in more established hubs, Barcelona Tech City is a “more private than public” initiative, which brings together the city’s most successful startups.
CEO Miquel Marti squeezed me into a diary stuffed with meetings with Spain’s politicians and technology superstars on a Friday at 17h. At 18h30, a man with the face of a patient but overworked new dad greeted me apologetically and lead me to his “office,” a desk unseparated from the rest of the building.
The kids keeping him up at night are from some of the ecosystem’s best venture capitalist companies, incubators and profitable startups, as well as old-fashioned utilities and hardware companies hoping to learn from them. He emphasises the government is not providing money for the scheme, “but when we need it, we ask them to open some doors. We go to to Silicon Valley with them and we do landing processes with them too.”
Working collectively, Tech City may be making progress. “Acció [part of the Generalitat’s trade and investment agency] is coming here to understand the startup mindset better. Today, we had a meeting with the Departament de la Vicepresidència i d’Economia i Hisenda. They asked us: ‘What should we do to make your life better?’ Stock options, a treasury for startups, social welfare for when they’re not making money yet… all these topics are now on the table.’’ It’s going to take a long time for the public administration to modernise but at least the right conversations are happening.
Initiatives like 22@, the state-founded innovation hub in Poblenou formed in 2000, also show the government’s willingness to facilitate growth. They made 22@ a tax-free zone for mobile startups. Business Managing Director of Eurecat, Miquel Rey, applauds the move but points out that other countries, like the Netherlands, have free economic zones (FEZ) that stretche over entire territories, where any startup that proves a commitment to growth and employment doesn’t have to pay tax initially.
Robert at Typeform repeatedly highlighted the need for more success stories. They will come with time. People – and businesses – need role models. “It’s important, no? People need to wake up and say ‘OK that’s possible.’” As their ecosystem begins to settle, Gómez says, more “young people are starting to ask, ‘Why not take on the United States?’”
Exits help sustain a growing scene. Those left behind can invest in the scene, not necessarily for the first time, and become role models. Agus at Wallapop talked hopefully of “the end of Wallapop, Typeform and [Madrid-based startup] CartoDB.” Usually, these guys will return to the fold with more money and the experience the scene so needs. Silicon Valley itself was formed by the exit of the Traitorous Eight, a group of astute businessmen who were directly or indirectly involved in the beginnings of almost all the ecosystems’ early companies like Intel and AMD.
BARCELONA, LA CAPITAL
Though most want to celebrate the growth of Spain’s ecosystem as a whole, Barcelona has been dubbed by many as the “startup capital of Spain.” Some Madrileños look for reasons to disprove the claim, but, in the words of startup expert, all-round nice guy, and founder of tech startup blog Novobrief Jaime Novoa, “there’s no need to keep on looking because it’s true.” In both size and number of investments, the city trumps Madrid by quite a way.
“We have found Madrid more business-friendly than Barcelona,” says Angel at AirBnB. “But they miss the energy of a real ecosystem.” Energy and talent, more than money, are what leads a scene to grow and it’s almost impossible to predict where they will occur. Luis Cabiedes explained it with one of his analogies: “You have a garden. You can’t know where the anthill is going to show, but if you see five ants, that’s where it’s going to show.”
Barcelona has an anthill for reasons that are probably random. While geographical, educational, cultural and other factors help, whether they will come together in the right way is almost impossible to predict. Spain isn’t the only country that has a startup capital different to its actual one, either. The same reasoning can explain, or not explain, why Italy’s more stable economy has been slow to generate much of its own startup heat. An analysis for PWC by Julia Prat, the head of entrepreneurship at IESE, looked at what the world’s best ecosystems did right. Not one had developed in the same way, a frustration for those trying to mimic them. The organic growth of Barcelona’s ecosystem is undeniable, now it is up to public and private forces to help.
Comparisons to London, Paris, Stockholm and Berlin are generally seen as preposterous. A study that looked at all European tech startups that raised over $1 million in 2016 before September revealed that Barcelona saw 28 private investment deals take place, placing it fifth in Europe. Ok, London had 138 but that still puts Barcelona above Munich, Amsterdam, Dublin, Copenhagen and Milan.
THE ICING ON A RUBBISH CAKE?
Startups aren’t the be-all and end-all, however. Entrepreneurship is the result of a healthy economy. With an unemployment rate of just below 20%, Spain’s is still looking pretty poorly.
The startup world is new and glamorous but a strong customer base is just as crucial to the ecosystem as a fancy CEO. It is no coincidence that the best startups will most commonly come from the strongest economies. Scaling up and selling products within Spain is notoriously difficult. The successes of Wallapop and Typeform have occurred thanks to their ability to find investment and customers abroad but even Gómez at Wallapop spoke jealously of how much easier it must have been for rivals OfferUp, being born in the US market. “We have had to do an incredible journey to get to the same level as them.”
Developing a strong domestic customer base can only come from more basic economic recovery. While a flourishing ecosystem can bring more money and substantial change, we have to be careful the fanfare doesn’t distract from the fundamental issues the nation must contend with. If the economy does not improve, then the ecosystem will be icing on a rubbish cake.
Barcelona already has many of the vital ingredients to become a technology hub. It is a beautiful city, attracting and spending money better than ever. It already has a good airport and transport facilities, capable of ferrying entrepreneurs and products across the world. It is exhibiting a commitment to technological development and learning from its mistakes and more mature cities.
Its flaws, bureaucratic, legal and cultural, are going to take a while to iron out. The conversations are beginning, however, and if the rapid change that has been seen already can be maintained, the lessons and successes of Barcelona’s startup culture could lift the rest of the country with it.
There’s hope that the trailblazing of those at the top will lead to meaningful change for the bottom. As the big guys demand improvements in education, welfare, administration, tax and general business acumen, the little ones should benefit too. I’m suspicious of trickle down reasoning, especially when millionaires explain it to me, but their work is certainly leading to a cultural shift.