Nurturing Spain’s hi-tech start-ups: an entrepreneurial culture has taken hold in Spain, but can it survive a recession?

After a late start, Spain’s entrepreneurial culture has taken root. It remains modest  compared to other European countries such as Switzerland, Germany, Denmark, Sweden or the UK, but the good news for Spain is that the credit crisis seems not to be hitting the investment climate yet. While larger investments have dropped off drastically, venture capital in early stage high-tech companies seems to be resisting the financial collapse.

At the Neotec Forum, one of the most important events for connecting entrepreneurs and investors in Spain, the financial crisis was not (openly) in evidence. “The forum has gathered momentum and reached cruising speed since its foundation in 2001: the number of investors is exactly the same as in previous years,” said Juan Carlos Fernandez Doblado, the organiser of Neotec, which was held in Palma de Mallorca in November.

Neotec was set up by the Centre for Development of Industrial Technology (CDTI), the Spanish government’s main body for promoting innovation and technology transfer. 16 business plans, mainly in information technology and life sciences, competed for the attention - and money - of 50 venture capital firms and business angels.

Small deals are an issue

According to CDTI the majority of investment deals in Spain range from €800,000 to €1.5 million. “One of the biggest problems in financing start-ups in Spain is that it’s very difficult to attract investments over €3 million, which makes the growing stage of the start-up very difficult,” says Luis Ruiz-Ávila, a serial biotech entrepreneur. He is the architect of two of the most successful Spanish biotech start-ups, Advancell and ERA Biotech, both based at the Scientific Park of Barcelona.

Although the sector is moving in the direction of bigger funding rounds, 80 per cent of firms with venture capital backing received less than €1 million in 2007, according to the Spanish association of venture capital firms, ASCRI.  And because of the funding scarcity, Spain is still struggling to create an industrial network with all the ingredients for nurturing fast-growing technology-based start-ups.

Obstacles to Entrepreneurship

There remain major obstacles to entrepreneurship in Spain, where in common with much of the rest of Europe, there is a high level of risk aversion and a fear of failure. “Failure is punished in Spain. There is no culture of failure like in the US. And [yet] innovation and failure are siblings,” says Alec Mian, a Canadian entrepreneur and biochemist based in Barcelona. Mian founded Genmedica Therapeutics in 2004 to develop new diabetes treatments.

Mian foresees some collateral damage in the biotech landscape because of the global financial crisis, but believes that will help weed out the stragglers. “Because there is no acceptance of failure, there are some companies that found it hard to accept they had to shut down, and struggled to continue [as going concerns],” he explains. “As a result, good resources were put into dead companies. Now, companies will probably need to stop operations, finally.”

University spin-offs are faring better

The picture for university spin-offs is substantially better. A 2007 reform of the law eliminated some of the barriers in the way of spin-out companies from publicly-funded research projects. Now university professors can ask for a 5-year extended leave of absence to set up their own companies, and patents are recognised alongside scientific publications as markers of a successful academic career. These measures, however, have not been entirely successful: “university professors still fear to quit academia to start up a business,” says Fernando Albericio, Professor of Organic Chemistry at Barcelona University. Since 2006, Alberico has been managing director of the Barcelona Science Park, which is home to research groups from both the public and private sectors.

According to a report by COTEC, a Spanish private foundation for technological innovation, the number of start-ups from Spanish universities grew by 62 per cent in 2007, compared to 2006, with a total of 146 technology-based companies spinning out of the sixty public universities in Spain.

Some universities are setting up their own venture capital funds to finance early stage projects. In 2000, Professor Carlos Hernández established the first such fund in Spain, Unirisco, at the University of Santiago de Compostela in the northwest of the country. The money came from savings banks and companies in the region, including Inditex, the company behind the Zara clothing retail empire.

Finding feasible business plans

Hernández believes that the main barrier to generating start-ups is a lack of good coaching for incipient ideas. “Some years ago, the problem was to find seed capital; now we’ve got the money, but good ideas are not turned into feasible business plans,” he says.

A notable example of how the combination of a good idea and suitable coaching can bear fruit is the renewable energy consulting firm, Meteosim.  Physicist-entrepreneurs are a rare species, but the founders of Meteosim devised a way to commercialise meteorological simulations carried out in the Physics Faculty of Barcelona University, generating wind maps that are used, for example, to plan new wind farms.  

Meteosim began life in 2003 with only €42,000, and the company is forecasting revenues of about €3 million by the end of 2008.  It is now the leader in its field in the European market and just teamed up with an American company to create a spin-off, Meteosim Truewind, specialising in renewable energies.

“Internationalisation is basic to the innovative business: you need to search for new opportunities outside Europe in order to increase market prospects,” Meteosim CEO Joan Aymamí explains.

Rodolfo Carpintier, a fellow Spanish entrepreneur, shares this view. His latest project is the internet business incubator Digital Assets Deployment, in Madrid. This provides early stage capital and business coaching to speed-up company formation. Five out of 19 projects in the incubator are based in the US.

Carpintier is uncertain about how the financial crisis will end up affecting entrepreneurship in Spain, but identifies a central problem. “This is a country where most people want to work for multinational [companies] or become a civil servant. University study plans are designed to train employees, not to foster entrepreneur spirit. This has to change.”