Endorsed not long ago by the government for propelling Spain to “Entrepreneurial Nation” status and "an international reference for technological innovation,” Spanish tech startups say they now have been left out in the cold by the state, as the country suffers its worst recession since the Spanish Civil War more than 80 years ago.
Battered by the Covid-19 pandemic, Spain has forecast its economy to shrink 9.2% this year, and its unemployment rate to soar to 19% from about 13% last year. The country has been under lockdown since March 14, with a phased lifting of restrictions that began on May 4.
The Spanish Startups Association (Asociación Española de Startups, or AES), representing 350 startups, has repeatedly demanded a stronger response from the Spanish government “to maintain business activity, liquidity and the work of startups as other European governments are doing.” Specifically, it notes France has earmarked €4bn to support new startups alone and is paying the salaries of 84% of startup employees, while Germany has a €2.2bn rescue program exclusively for startups.
The AES laments the lack of startup-targeted government assistance suited to their unique setup and funding needs in relation to traditional businesses, unlike in France, Germany and Portugal. Most importantly, startups won't be able to access much of the €200bn worth of state financial aid for the Covid-19-hit private sector because it is directed at companies with banks as their main funders.
“This type of assistance, easing access to credit for entrepreneurs does not work for startups because they have other types of metrics and risks that differentiate them from other, traditional businesses, and results in banks not wanting to take the risk of lending to startups, even when the credit is government-backed,” the AES told media.
Spain currently has the highest number of infections in the world after the US, and the fourth highest number of mortalities. As of May 9, Spain has 224,390 known cases of infection and 26,621 deaths, according to government data.
Obstacle paralyzing investments
Investors in the Spanish startup ecosystem have also voiced strong concerns about the government's latest restriction on new foreign investments exceeding €1m for Spanish companies in “strategic sectors.” Already the country's startups are expecting funding to plunge this year, because of the economic crisis and liquidity crunch in Spain and globally. In 2019, Spanish startups attracted €1.22bn in funding rounds from private and state investors.
The new tightening, while “very logical" in the current climate, “has been applied so broadly that it could pose many problems and paralyze investments,” warned Miguel Zurita, President of the Spanish Venture Capital & Private Equity Association, or ASCRI, which is made up by nearly 100 national and international VC and PE firms. “In the end, this can impede the sector, which offers many resources necessary for Spain's economic recovery.
It is extremely important that we do not put up such obstacles and lose the money that could come into Spain
“We believe that it is extremely important that we do not put up such obstacles and lose the money that could come into Spain,” he said. “This is an especially serious issue, if you take into account that private-sector investment in Spain rose to an all-time high of €8.5bn last year.”
Under the new regulation, foreign investors – which would include Spanish asset funds that have 25% of their investors from outside Europe – would need to get government approval for any single investment exceeding €1m in the sectors of energy, critical technologies (AI, robotics, nanotech) and communication and media. The rule also applies to companies with access to sensitive information such as personal data, or with the capacity to control such data. It's “a disaster for the tech startup industry,” said Spanish angel investor Eneko Knorr.
Fear losing competitiveness
The Socialist government's failure to address the specific demands of the tech ecosystem is at odds with the widespread support and promotion it had given the sector since coming to power in June 2018. The administration created the post of Secretary of State for Digital Advancement the following month, appointing Francisco Polo, Change.org's former Spanish CEO, to the post. The Spanish PM, Pedro Sánchez, and other key ministers have also attended Madrid's South Summit, the key annual event showcasing Spain's startup ecosystem.
Writing in startup-focused online media El Referente, entrepreneurCarlos Mateowarned: ”If European countries support their startups and the Spanish government forgets about them, we will lose competitiveness in international terms in the coming years, just when we most will need to attract and retain talent.”
Luis Martín Cabiedes, Partner and co-founder of Cabiedes & Partners, one of Spain's most active VCs, told media that he was concerned about product demand and how long companies could hold out with hardly any revenue.“The bomb hasn't fallen on startups but the resulting fallout will affect us for sure,” he said.
The coalition government had announced around mid-March a raft of economic measures to help businesses cope with the slump, including credit lines, freezes on tax and social security payments and help with the salaries of under-employed and redundant workers. The AES said it had drawn up and shared with the government a list of startup-specific aid that the sector would need, days before the government announced the financial aid package.
In his personal blog, Marc Vidal, one of the Spanish ecosystem's most influential voices, says that in reality, the government is only making €1.7bn available to startups. The rest of the promised aid is only in the form of credit lines from the private sector and guarantees, he says, calling for a temporary freeze in taxes.
We will lose competitiveness in international terms in the coming years
Confusion also ensued, as local media reported that funding for startups from the two main channels of state financial aid – the Centre for the Development of Industrial Technology (CDTI) and Enisa, the state support agency for SMEs – had stopped.
Responding to queries by CompassList via e-mail, Head of Communications Ignacio A. Llorente of CDTI, which comes under the Ministry of Science and Innovation, clarified that “CDTI's assistance has not been halted.”
There was a slowdown in approvals “during the first few days of the beginning of April, due to the publication of the royal decree establishing the first state of alarm that required limitations on movement in the workplace that therefore also affected public employees,” he wrote.
Enisa reportedly hasn't yet received its 2020 funds – worth €100m approved in 2019 for €25,000-€1.5m funding per project – from state coffers. The agency hasn't responded to CompassList's request for comment.
Reducing staff, hours
Following its initial announcements, the Spanish government is now preparing a new raft of proposals for companies with a revenue of less than €600,000. These include payment of taxes according to the last quarterly revenues instead of the usual preceding quarter. This will benefit hard-hit companies. The government has already announced a month's fiscal moratorium for the same lowest-earning SMEs.
With financial help for startups seemingly up-in-the-air at present, one of the first actions taken by many startups, both large and small, has been to file for either temporary redundancy or forced reduction in hours for staff, collectively known as ERTE (expediente de regulación temporal de empleo, or temporary redundancy plan).
Glovo, with more than 900 employees in its Barcelona offices, has seen its business activity decline and so has made 38% of its workforce there temporarily redundant. At the same time, the new unicorn will reportedly seek to increase the tranche paid by its four-month-old €150m funding round to maintain business activity, though funding was originally largely granted for further market expansion. Glovo co-founders Oscar Pierre and Sacha Michaud have also given up their full salary for now. Cabify, another Spanish unicorn, has applied ERTE to 450 of its workers.
Travel marketplace eDreams Odigeo, of Spanish origin and with its biggest office here, applied a 40% reduction in the working hours for 90% of its Spanish workforce of 985 during the state of alarm. It will also move its headquarters to Spain from Luxembourg to save costs. However, other hard-hit travel startups like Barcelona-based Travelperk are yet to implement either ERTE measure for its 450+ staff.
For many of the smaller Spanish startups with only the co-founding team working on the business, an ERTE is not possible because founders aren't counted as formal employees under the national social security system.
Drone startup FuVeX, with 12 staff, is one of two companies that CompassList spoke to that have opted for an alternative to temporary redundancy. “We are not requesting ERTE, because together with our workers, we are looking for other solutions, e.g., vacations, teleworking, that will allow us to still progress and ensure that the team doesn't lose part of its salary,” CEO and co-founder Carlos Matilla Codesal said.
“Also, we don't believe that we can progress as a country if everyone is taking temporary redundancy and we have tried to be mindful of this.”
At blockchain development platform Vottun, “for the time being we have not filed for temporary redundancy and our business activity has continued,” Luis Carbajo, the company's CEO and co-founder, told CompassList.
What we've done is to see how we can help, and we've created a product to help come out of the lockdown
“Like everybody else, we have had to adapt to what might happen. What we have done is to see how we can help and have created a product to help come out of the lockdown. We have created an alliance with PwC to commercialize it and are seeing interest worldwide.”
Vottun's new product is a digital sanitary “passport” app for workers enabling consultation in real time of the holder's Covid-19 test result via a QR code, which can be used to enable a safe mass return to the workplace when lockdown restrictions ease. Until now, the majority of the workforce has been working from home and only those in essential sectors or are unable to work from home, like builders, have been allowed to return to their work premises. Vottun's app could also serve these workers, too.
CDTI refutes funding halt allegation
On allegations that CDTI has suspended funding, its Head of Communications Ignacio A. Llorente writes, replying to CompassList's queries: “CDTI's assistance has not been halted. On the contrary, assistance is being allocated even more handily.”
Since March 16, the center had made public a raft of resolutions and exceptional measures, he says. In 2019, the CDTI handed out grants of up to €250,000 each to 198 startups. The latest resolutions issued include exemption of guarantees for SMEs and mid-caps worth €500m in total; upcoming innovation grants of its NEOTEC program, worth €25m, to be released as soon as the situation allows; and, the faster approval of new funding for projects.
On the slowdown in funding approvals in early April, he says: “Companies with approved projects and aid granted were informed that legal signatures would be delayed by some days which did not imply any kind of halt to aid, but merely a delay of a few days in signing them off.”
He adds that CDTI grants have been facilitated “in record time” but that, even so, the organization has had to act according to its legal obligations with respect to the royal decrees currently in place.
“It has been weeks since signing off on projects has returned to normal, and, right now, the process is working without any incident.”
Llorente stresses that the majority of CDTI grants can be applied for throughout the year online and that this process continues, meaning “companies don't need to take any particular action to request them at this stage.” In-person procedures like notary signatures are only required when legislation demands it, and this is in less than 5% of cases.
The AES's key demands
Supportive measures that the Spanish Startups Association (AES) is seeking from the government include some already conceded by other European countries, such as an immediate reimbursements of VAT payments, greater flexibility in the application and processing of state loans for innovation-related entrepreneurial projects, and boosting state co-financing of projects as Germany and France are doing.
The association also demands a freeze on all social security payments, especially for the smaller startups, until normal economic conditions return; an acceleration of the promised reimbursements; and excluding startups from the restriction on receiving foreign capital, which it says should apply only to listed companies. In addition, the AES wants startups exempted from the strict requirements for obtaining state-guaranteed loans worth up to €100bn in total.