A flying start

December 1, 2017 12:00 AM

Hear the word ‘startup’ and your mind probably conjures up images of jeans-clad, bearded computer engineers in a messy coworking space or garage; or maybe you see a powerful tech mogul like Steve Jobs. No matter which image your mind lands on, one thing’s clear: we live in the golden era of startups. Individuals like Elon Musk enjoy the kind of celebrity status previously reserved for rock stars, and your introverted neighbour might have an idea making him the next Forbes ‘30 under 30’ billionaire. More than anything, it has transformed the way we see entrepreneurship as a viable means of making a living.

It’s easy to see the appeal of Barcelona to both talented Europeans working in the tech industry and entrepreneurs looking for the perfect breeding ground for a new business: Barcelona’s startup ecosystem is buzzing. A recent report by Startup Genome, a research-focused non-profit organisation working to increase the success rate of startups, reveals that the city is home to more than 1,000 startups—three times more than the average number hosted by other similarly mature ecosystems—and estimates the sector's value at €5.5 billion. And with the city hosting world-class events like the Mobile World Congress (MWC), and success stories such as the recent acquisition of gaming company Social Point and online-fashion outlet Privalia for $270 million and $560 million respectively, optimism seems well-grounded.

Jordi Romero, co-founder of venture builder Itnig and CEO of HR software company Factorial, has witnessed the industry’s transformation from its early days. Together with a group of computer engineers, he founded Itnig in 2011. After successfully launching Itnig's first startup, Camaloon—a promotional products supplier that now employs over 120 individuals—Romero joined the leadership team at another startup, Redbooth, a project management platform. “When I started working at Redbooth, I knew about computers but I had no idea about investments or startup business models.” Back then, not many investors understood software as a service (SaaS), so they had a hard time pitching to Spanish investors—an issue which eventually led Redbooth to move to San Francisco. Romero went with them. “It wasn’t as easy as just moving the headquarters and then immediately getting funded millions of dollars, but it was a great experience.” Looking at the open-plan office occupied by Itnig and its six startups—located in the booming 22@ district—it seems difficult to imagine any setbacks. “Silicon Valley was basically 15 years ahead of us here, and when I came back to Barcelona I just thought ‘wow, we still have so much to do before we get to their level’.”

Juan Alvarez De Lara, the CEO of Seed&Click, a network that connects entrepreneurs with investors, founded his company in 2013 in order to tackle precisely some of these issues. “I saw that there was an issue with the financing of projects on one hand, and a pool of talent eager to make things happen on the other.” So what has changed since those early days?

Startup hub

In the past 10 years, Barcelona has managed to place itself at the top of the European league of startup communities. According to Catalonia Trade & Investment—the Catalan government’s agency for foreign investment and business competitiveness—the city's startup ecosystem employs around 11,700 people and is ranked fifth in Europe behind London, Berlin, Paris and Amsterdam.

Alvarez De Lara believes the public administration’s early understanding of its role and the need to catalyse the ecosystem has been crucial: “If you look at Barcelona Activa, it’s one of the most important incubators in Spain, both at a public and private level.” Lorenzo Di Pietro, the Executive Director of Entrepreneurship, Enterprise and Innovation at Barcelona Activa, explained that a lot has changed in the 30 years since Barcelona Activa was first founded: “The success we see now is the result of efforts that started many years ago, when the city’s infrastructure was improved significantly through the creation of an international airport, a port that’s increasingly climbing international rankings, and business schools on the world’s top 10 list.” These factors have allowed Barcelona to gain a name on the international stage and open itself up to the rest of the world. The projection of the city’s image through events such as the MWC has also been fundamental: “It’s not enough to do things well at home if the rest of the world doesn’t know about it,” said Di Pietro.

Another aspect that has changed considerably is the city’s funding landscape. A strong startup ecosystem needs a healthy economic foundation in order to feed its startups with talent, money and experienced founders. According to Barcelona’s city council, there are now around 30 private accelerators and annual streams of seed capital of over €400 million. Alvarez De Lara has seen it up close: “There’s been an evolution of funding mechanisms in the past years, with much more funding available.” But it’s not just the money that has increased; so have the number of startups fighting for it, creating an environment of healthy competition that could actually contribute to better startups and larger exits.

Ignacio Fonts, CEO and General Partner of the VC fund Inveready First Capital, believes Barcelona’s competitive advantage largely lies with the people that call it, or choose to make it, their home. “The internationalisation of the city has created a diverse environment, and diversity is crucial in business. Merging people from different backgrounds, talents and experiences is key if you want to become global.” One frequently mentioned reason behind Barcelona’s ability to attract and retain top talent is its attractive lifestyle and weather. The wages might be lower than in other European startup hubs, but Alvarez De Lara believes that the city’s dynamic lifestyle and its geographical location make up for it: “Maybe you sacrifice a higher salary but you win in quality of life and happiness. You get a higher emotional salary.” But there’s another side to the coin. According to Lorenzo Di Pietro, low wages are only a competitive advantage in the short run. In the long term, they can make companies lose talent just as quickly as they acquired it. He believes that companies with a strategic, long-term plan come to the city because of other advantages.

Challenges ahead

Right now, Barcelona and Catalunya are at a ‘clear inflection point’, according to Startup Genome. The city’s startup ecosystem may be maturing, but continued growth and success cannot be presumed; public and private stakeholders must act in order to make the shift ‘from a local or regional-focus to a going-global orientation’. As Dane Stangler, Head of Policy at Startup Genome, commented over Skype from San Francisco, “It’s like that old saying, ‘what got you here won’t get you there’. Now that Barcelona has experienced the growth and momentum that it has, it requires a different set of actions and priorities to keep that growth going.”

Jordi Romero agrees that more growth and success stories are crucial. “In Silicon Valley, there are so many massive exits that people really believe in startups. In Europe, we’ve just had a few of those massive unicorns, like Spotify. We need more really successful startups in Europe, and they don't need to be in Barcelona—we’ve all got a shared reputation.” He reports that lately, people from Berlin, Paris, London and Amsterdam come to Barcelona and ping entrepreneurs to meet for a coffee. “I think we live in a regional bubble, but we're now five bubbles that are starting to become connected. We're slowly embracing the idea that we should all be the same ecosystem, because it will give us a much broader reach.”

Startup Genome identified connectedness as one of Barcelona’s three main challenges: ‘Despite a good level of global connectedness, Catalan startups do not sell to global markets at a high rate’. Research has shown that this constrains growth, as startups that sell globally grow twice as fast as those only selling domestically. Barcelona needs to close this gap by helping local startups sell internationally, by retaining foreign students from local universities, and by globalising organisations that support entrepreneurs. Romero agrees that it’s difficult to expand to new markets and that startups struggle to go beyond the local market. “If you kill it in Barcelona, then what’s next? Spain? It’s a small and risk-averse ecosystem. From here you go to France and Germany, but it's much harder to spread organically and requires a strong strategy and a lot of investments.”

The startup world is one in which very few succeed. There are no official statistics, but Alvarez De Lara estimates that the general success rate of startups is about 10 percent. Ignacio Fonts, too, cited a low success rate: “Probably less than five percent of startups will survive five years, and probably less in 10 years.” Success refers to the startups that manage to create the strong return on investment that their investors hope for. For the ones that neither sink nor swim, there’s always the risk of stagnation, or what Alvarez de Lara calls the "zombie phase”, which includes startups that are alive and generate income, but don’t grow enough to sufficiently multiply their investor’s money.

Despite increases in funding in recent years, access to sufficient resources still poses a challenge; the average early-stage funding per startup is $223,000, just below the global median, according to Startup Genome’s report, which also recommends that ‘the region should focus on creating new funding programmes and incentives to attract more international investors and increase early-stage capital’. Miquel Marti, the CEO of Barcelona Tech City, the non-profit initiative behind Pier01—a 1,100-square-metre space in Port Vell hosting more than 100 startups—thinks that “Barcelona should work on improving the legal, tax and financial frameworks for startups and investors. We need to make it really easy to attract investors”. Currently, legislation focuses on large companies and it is difficult to adapt it for small businesses. This means that there are only a few large investment funds in the city and that startups are often forced to go abroad to search for funding.

Then there’s the looming question of Catalan independence, which has already started to affect Barcelona’s business community. “Money is very fleeting, and whenever it’s faced with uncertainty or a lack of legal framework, it will go and look for stability,” said Alvarez De Lara. Hundreds of companies have moved their headquarters outside Catalunya, in search of a stable legal framework, at least until the political situation is more clear. “If the situation becomes chronic and there’s no sign of stability in the near future, companies might choose to set up elsewhere, and the same goes for investors.” The future is uncertain, but he hopes the issue won’t slow down the ecosystem’s momentum.

Where do we go from here?

Barcelona’s appeal doesn’t lie in lax corporate and tax regulations, and rather than looking to become the next Silicon Valley or Berlin, perhaps the city should strive to capitalise on what makes it unique. “There’s an important value in the singularity of Barcelona, and one of the challenges we’re facing is to keep our own, unique model and identity,” said Lorenzo di Pietro. “It can be dangerous for the ecosystem to try and mimic other contexts. Instead, we should let the city grow around its own values and give a voice to entrepreneurs and actors that want the city to become a place where business projects with a social impact can thrive. As a city, we have to fight against inequality and encourage more social cohesion. The role of a company today is not only to create economic wealth, but to be a key actor in moulding a city where the quality of life and employment are better, and to us, that’s one of the key ingredients of the Barcelona of the future.” The Barcelona model has taken us a long way; now, the city’s facing the possibility of shaping its own narrative and a chance to become something truly special. And maybe only then, will the unicorns follow.

Where Are The Women?

There are very few women in the startup game. Crunchbase’s global study of female founders, surveying over 42,000 global companies, found that the percentage of women-founded, venture-backed companies has stagnated at around 17 percent since 2012. “Women are far from well-represented in Barcelona’s startups. It’s a tough issue that’s often connected to the fact that there is a lack of women in some fields,” said Laura Urquizo, CEO of Red Points, a technology company focused on combating piracy and brand abuse online. She stressed the importance of promoting inclusive values and offering incentives to counteract this reality: “It’s something we do at Red Points, and I can guarantee that the benefits to our business are evident—diversity is a clear competitive advantage.”

5 Local Success Stories

Glovo

Founded 2014

Glovo delivers anything you can think of (except for live animals) from over 3,000 local suppliers straight to your door in under an hour, by assigning tasks to independent couriers, known as ‘Glovers’.

Wallapop

Founded 2013

This marketplace app uses geolocation to match local buyers and sellers, and has changed the way we see and sell secondhand items. Think of it as an online flea market where you can find and sell almost anything.

TravelPerk

Founded 2015

TravelPerk aims to revolutionise the way that organisations budget, book and manage their business travel. The tool allows anyone to manage all their travel in one place, it’s free to use and makes it easy to compare prices and get the best deal.

Typeform

Founded 2012

Typeform wants to revolutionise form filling by making the process of gathering large scale information more beautiful, interactive and human. It allows anyone to build good-looking and easily shared surveys and forms using templates, or just their imagination.

CornerJob