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Venture Capital in Catalonia. The Underused Economic Growth Factor (by Oriol Valentí i Vidal and Silvia Corbella Baselga)
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Venture Capital in Catalonia. The Underused Economic Growth Factor (by Oriol Valentí i Vidal and Silvia Corbella Baselga)


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Venture capital only started to flourish in Catalonia in the early 2000’s. Nowadays more than ten funds operate continuously in our country, thus generating a snowball effect from which our economy …

Venture capital only started to flourish in Catalonia in the early 2000’s. Nowadays more than ten funds operate continuously in our country, thus generating a snowball effect from which our economy benefits. This paper purports to make a broad overview over the venture capital industry in Catalonia in order to, first, analyse its main problems to make it become a genuine growth factor and, then, suggest some possible solutions.

El document "Venture Capital in Catalonia. The Underused Economic Growth Factor" ha estat realitzat per Oriol Valentí i Vidal i Silvia Corbella Baselga, estudiants de la Universitat Pompeu Fabra.

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The document "Venture Capital in Catalonia. The Underused Economic Growth Factor" has been written by Oriol Valentí i Vidal and Silvia Corbella Baselga, Universitat Pompeu Fabra undegraduate students.

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  • 1. Universitat Pompeu Fabra Venture Capital in CataloniaThe Underused Economic Growth Factor Oriol Valentí i Vidal (NIA: 67328) Silvia Corbella Baselga (NIA: 67124) Final Thesis 14 March 2013
  • 2. VENTURE CAPITAL IN CATALONIAAbstract: Venture capital only started to flourish in Catalonia in the early 2000’s.Nowadays more than ten funds operate continuously in our country, thus generating asnowball effect from which our economy benefits. This paper purports to make abroad overview over the venture capital industry in Catalonia in order to, first, analyseits main problems to make it become a genuine growth factor and, then, suggest somepossible solutions.Key words: venture capital, Catalonia, economic growth, investment, job creation. 2
  • 3. VENTURE CAPITAL IN CATALONIA Table of Contents1. Introduction .................................................................................................................. 42. Conceptual Map, Methodology and Limitations .......................................................... 53. What is venture capital? ............................................................................................... 64. Economic and Social Impact of Venture Capital ........................................................ 11 4.1 Venture capital makes companies grow............................................................... 11 4.2 Venture capital contributes to job creation ......................................................... 12 4.3 Venture capital promotes investment and fosters innovation ............................ 14 4.4 Venture capital speeds internationalisation......................................................... 14 4.5 Venture capital reduces business failure rates ..................................................... 15 4.6 Venture capital favours the creation of a start-up ecosystem ............................. 15 4.7 Conclusion ............................................................................................................. 155. The Venture Capital Industry in a Snapshot ............................................................... 166. Main Problems Faced by Venture Capital in Catalonia .............................................. 21 6.1 Lack of Entrepreneurial Culture ............................................................................ 21 6.2 Lack of Track Record and Difficult Access to New Funds ..................................... 24 6.3 Legal and Tax Framework ..................................................................................... 25 6.4 Exit problems ........................................................................................................ 287. Some Suggestions on How to Foster Venture Capital in Catalonia ............................ 31 7.1 Promote an Entrepreneurial Culture .................................................................... 31 7.2 Attract New Funds ................................................................................................ 33 7.3 Legal and tax framework ...................................................................................... 34 7.4 Secondary markets and exporting ........................................................................ 358. Conclusions ................................................................................................................. 389. Annexes ...................................................................................................................... 3910. Bibliography .............................................................................................................. 42 3
  • 4. VENTURE CAPITAL IN CATALONIA1. IntroductionWhat do Catalan companies Vueling, eDreams, Softonic or Privalia have in common?They all were, in their beginnings, partially financed by venture capital funds, whichnot only provided them with the necessary capital to operate but also offered theirexpertise, connections and management support. In short, these funds helped to fillthe so-called “equity gap” –the period in companies’ life where it is of utmost difficultyto find financing, usually because there are no hard assets against which to securebanks’ debt.In Catalonia we are currently facing a dramatic economic and social situation –23.94%unemployment rate (as of February 2013), GDP in almost constant decline since 2008,thousands of young graduates emigrating, shrinking credit markets, etc. Therefore, itseems that the traditional forces of economic growth have been exhausted. This papersupports the opinion that innovation (in whatever form) and specialisation in certainindustries can help the Catalan economy to recover and lay stronger foundations forfuture growth. In this sense, venture capital can play a decisive role, since not only itprovides financing to companies where no credit is available, but also it makescompanies grow and contributes to job creation.Indeed, numerous reports acknowledge the strategic need of promoting thesefinancing vehicles, especially in times where access to bank credit is very limited. Wecould mention, among others, “Catalonia: Vision and Future Economic Objectives”,from the Advisory Board for Economic Recovery and Growth (Consell Assessor per a laReactivació Econòmica i el Creixement, in Catalan) or the “Program of MunicipalAction” of the City of Barcelona. With this short paper we wish to contribute to thetrend that backs venture capital as a means to economic recovery.In order to do so we have divided this paper as follows. In the next section we explainthe theoretical framework that encapsulates this research, as well as the methodologyemployed and its possible limitations. In section three we briefly define venture capitaland put it into the perspective of companies’ lifecycle. Section four reviews part of theextensive literature on the topic of the economic and social impact of venture capital,and connects it with the Catalan scene. In section five we make a snapshot of theventure capital industry in Catalonia and in Spain. Section six analyses the mainproblems faced by the Catalan venture capital industry according to interviewedexperts. In section seven we try to offer some possible suggestions on how to fosterventure capital in Catalonia. Last but not least, we conclude in the last section withsome insights of what can be learned from this paper and suggest possible furtherresearch on this area. 4
  • 5. VENTURE CAPITAL IN CATALONIA2. Conceptual Map, Methodology and LimitationsThis final thesis should be contextualised in the broader perspective of the finance,marketing and strategic courses taught at Universitat Pompeu Fabra. However, thispaper purports to establish a holistic approach to venture capital in Catalonia, ratherthan analysing it using different self-contained compartments. Therefore, finance,marketing and strategic management concepts and assumptions are employedthroughout the thesis without explicit mention.As far as methodology is concerned, research is typically divided into primary andsecondary. Primary research generates direct new information, whereas secondaryresearch is based upon already existing data. Both the former and the latter can bequantitative and qualitative. Due to limitations of time (10 weeks) and space (35pages), we have used primary qualitative information and secondary quantitative data.With regards to primary qualitative information, we have conducted a set of personaland phone call interviews with recognised experts, the names and positions of whichcan be found in a table below. Regarding secondary quantitative data, we have read,analysed and summarised numerous reports available on the Internet, and consultedspecialised websites and blogs. The full list is available on the bibliography, and whenspecific sources are used they are mentioned in footnotes.Finally, it should be noted that this paper suffers from certain limitations, amongstwhich we would highlight the selection bias (section four), the lack of specific studiesabout the state of the venture capital industry in Catalonia (section five), and theassumption that Catalonia can legislate in certain areas the competence of which is theSpanish central State (sections six and seven). Ángela Alférez Director of Research at ASCRI Celia Andreu Principal at MCH Private Equity Javier Bultó Founder and Director at Finaktor Christian Fernández Senior Manager at BCN Emprèn Ferran Lemus President and Partner at Highgrowth Felipe Muntadas-Prim Director General at Avançsa Oriol Sans Director of Financing Division at Acció Enrique Tombas Founder and CEO at Suma Capital Figure 1. Interviewed experts 5
  • 6. VENTURE CAPITAL IN CATALONIA3. What is venture capital?In 1946, ADR (America Research & Development Corp.) was the first modern venturecapital firm incorporated in the world. Its founders were MIT president Compton,Massachusetts Investors Trust chairman Griswold, Federal Reserve Bank of Bostonpresident Flanders, and Harvard Business School professor Doriot. The goal of thecompany was to “finance commercial applications of technologies that weredeveloped during World War II”1.After the creation of this firm a venture capital industry flourished in the USA, but itwas not until the late 1970’s that the industry really grew2. During these past decadesthe activity of equity funding has reached an enormous importance in the U.S., helpingto make companies like Google or Facebook become what they are nowadays.In order to define venture capital the reader should pay attention not to confuse theterms private equity and business angels, which are other financing means to invest innon-quoted companies. In this regard, the boundaries between these concepts aresomehow blurry and in this section we define each of them to avoid confusion.Venture capital firms provide temporal capital to unquoted and high growth, high riskcompanies, thus helping them to develop and succeed thanks to its financing,management help, experience and connections. Hence, venture capital is a specifictype of finance, a cluster of private equity, which capitalises companies trough equityparticipation overcoming its funding gap in early stages.Note that private equity and venture capital are not the same. According to theEuropean Venture Capital Association (henceforth, EVCA), private equity is the“provision of equity capital by financial investors- over the medium or long term- tonon quoted companies with high growth potential” 3. It thus includes the financing ofcompanies in the successive phases of its development.On the other hand, venture capital is “a subset of private equity and refers to equityinvestment for the launch, early development, or expansion of a business”4. Its main1 GOMPERS and LERNER (2001), A Note on the Venture Capital Industry, Harvard Business Review, p.5.2 Ibid, p.7.3 EVCA (2007), Guide on Private Equity and Venture Capital for Entrepreneurs, p.6.4 Ibid,. p.6. 6
  • 7. VENTURE CAPITAL IN CATALONIAobjective is to back up entrepreneurs who are seeking to find capital to start a businessidea, therefore focusing mainly on start-up companies.Within the earliest stages or seed companies, the common funding sources are thebusiness angels, considered as “wealthy individuals who typically contribute seedcapital, advice and support for businesses in which themselves are experienced” 5.These are considered part of a more informal risk capital market. As with venturecapitalists, business angels do not only provide capital, but they offer their businessmanagement experience to the entrepreneur.In conclusion, the different types of funding sources vary depending on its stage: seed,start-up, post-creation, expansion and transfer (MBO/MBI). Venture capital usuallyinvests at the “start-up” stage, when the business plan is already done and the productis more mature. Figure 2. Funding sources in a company’s lifecycle Source: Fundación de Estudios Financieros (2005), El ciclo del capital riesgo en Europa: su gestión y aportación de valor, p. 29Once established what venture capital is, we shall examine its lifecycle andmechanisms through an analysis of the different stages an investment can undertake.The venture capital business model engages diverse participants: “entrepreneurs whoneed funding; investors who want high returns; investment bankers who need5 ZIDER (1998), How venture capital works, 76 Harvard Business Review 6, p. 138 7
  • 8. VENTURE CAPITAL IN CATALONIAcompanies to sell; and the venture capitalists who make money for themselves bymaking a market for the other three”6. Figure 3. How the venture capital industry works Source: ZIDER (1998), 76 Harvard Business Review 6, p. 137It is distributed into 4 main phases, taking into account that there are many variants ofthe basic deal structure –but the logic is always the same– and can be viewed as thefollowing cycle: a. Creation of a fundOnce the funds are underwritten, in accordance with the Law 25/2005, 24 November,as modified by the Law 2/2011, the venture capitalists create investment funds, whichgather capital from subscribed investors for a certain period of time defined in itsinternal regime.Without any doubt, fundraising is the main setback for this industry speciallyweakened by the economic crisis. International investors are not willing to invest in theSpanish or Catalan market, due to lower expected returns; and the national ones havenearly vanished.As can be seen from figure 4, during the year 2011 a total of 2.4 billion euros wereraised, witnessing a decrease of a 25% compared to the previous year.6 Ibid., p. 135. 8
  • 9. VENTURE CAPITAL IN CATALONIA Figure 4. New funds raised and investment committed Source: ASCRI (2012), Informe, p. 14 b. Investing the fundThe second stage starts when the expected amount of capital is raised and itsmanagers target start-ups to invest in. Usually venture capital investors look for earlystage firms with several characteristics: “liquidity and growth indicator such as nearterm, 12-18 months, budgets, cash reserves, cash burn rates” 7, among others.Investing wisely the fund is paramount for obtaining the expected average return,since those “false positives” usually mean losing money. In this respect, interviewedexperts agree that if 2-3 invested companies from a 10 companies portfolio end upbeing successful projects they would get a “more than decent” return, since the profitsthey would make in their disinvestment would more than compensate the losses onthe other companies. Hence, in order to obtain very high returns it is needed to investinnovative companies, as value creation must come 100% for operational reasons andin a short period of time. c. Managing the investmentIn the management phase, venture capitalists undertake an active role, acting “as acoach for the company’s management to increase the value of the investment” 8 andplanning exit strategies bearing in mind the business’ future disinvestment.7 Madison Park Group (2011), Guide to venture capital, p. 98LEBHERZ (2010), The Venture Capital Cycle and the History of Entrepreneurial Financing, GRINVerlag, p. 11. 9
  • 10. VENTURE CAPITAL IN CATALONIAFrom the perspective of the entrepreneur, there is pressure on his company to havecertain rates of return; thus making the “company heavily financially driven”9 . d. Disinvestment and redistributionIn this last phase, venture capitalists disinvest in capital backed firms and distribute thereturn obtained up to the investors who created the fund.Venture capitalists benefit from capital gains, as “investee entrepreneurial firmstypically lack cash flows to pay interest on debt and dividends on equity” 10, when theyexit from the capital backed companies; therefore exits are essential in venture capitalcycle.According to several authors, there are four usual divestment exits: (i) initial publicoffering (IPO), where the company goes public on a stock exchange; (ii) acquisition byanother company; (iii) management buyout, when the entrepreneur repurchases theventure capitalists’ stake; or the worst case scenario, (iv) a write- off, which is theliquidation of the company.9 Ibid., p. 12.10CUMMING and JOHAN (2009), Venture Capital and Private Equity Contracting: An InternationalPerspective, Elsevier Science, p. 581 10
  • 11. VENTURE CAPITAL IN CATALONIA4. Economic and Social Impact of Venture CapitalIt is uncontested among scholars and practitioners that venture capital has a greateconomic and social impact in venture capital backed firms and society at large.Indeed, countless studies show evidence of this, and in this section we shall take a lookat the main arguments and figures put forward by those that argue so. The underlyingrationale for doing so is to stress that albeit venture capital still plays a limited role inthe Catalan economy and therefore it is the “underused economic growth factor”,much could change if it received a significant impulse from both the public and privatesectors. The following section presents two arguable drawbacks. The first one is thatwe extrapolate to our firms what happens with companies from other regions in theworld, since there are no specific studies for the Catalan economy. The second onerefers to the selection bias of most of these studies, that is, the fact that when capital-backed firms are compared with others sometimes these are from non-technologicalindustries which behave differently.4.1 Venture capital makes companies growIn the global marketplace, companies need to attain a certain size in order to surviveand compete11. However, the Catalan economy has traditionally been characterized bythe high number of SMEs. In this sense, in 2005 the percentage of firms that earnedmore than 50 million Euros compared to the total number of firms that earned at leastone million was much lower in Catalonia (12%) than in other European countries withsimilar dimension and number of inhabitants, such as Finland (28%), Belgium (40%) orSweden (50%)12. See exhibit two in the annexes for a further breakdown of this data.Therefore, it would be desirable that our companies increased their size. In thisrespect, during the period 2005-2008 (hence, including the first year of the economiccrisis) the sales annual average growth for capital-backed firms in Spain were above 8%vis-à-vis average decreasing rates of -7.7% for companies of the comparable group13.11 To have a deeper understanding of the relation between business size and productivity andprofitability read the very interesting report La dimension empresarial a Catalunya. Situació,característiques, determinants i propostes (December 2011), Consell Assessor per a la ReactivacióEconòmicai el Creixement, Barcelona.12 CAREC (2012), Catalunya: Visió i objectius econòmics de futur, Barcelona, p.116.13 ASCRI (2012), Informe 2012: Impacto económico y social del capital riesgo, Madrid, p.16. 11
  • 12. VENTURE CAPITAL IN CATALONIASimilar studies have been conducted in other parts of the world14 15 with the sameconclusions –after venture capital invest in firms, their earnings grow significantlymore than in similar companies not backed by venture capital. As the AsociaciónEspañola de Entidades de Capital-Riesgo (henceforth, ASCRI) suggests, one of the mainreasons for this to happen could be that venture capital speeds the introductionprocess of new products16.4.2 Venture capital contributes to job creationIn these dramatic times of unbearable unemployment rates (23.94% in Catalonia, as ofFebruary 201317), it is particularly important to foster industries and create tools thatcontribute to job creation. Venture capital does it at a faster rate than non-backedfirms, especially in their initial stages and in technological industries. According to theEuropean Private Equity and Venture Capital Association (henceforth, EVCA)18,employment in the surveyed venture-backed companies increased by an average of30.5% per year between 1997 and 2005. As they put it, it is around forty times theaverage annual growth rate of total employment in the EU 25 (0.7%). This figure risesup to 62.3% (yearly!) in university spin-offs19. Another way to see it is as follows: everycapital-backed firm in the seed or start-up stage created an average of 46 jobs percompany between 1996 and 200120.However, data used by EVCA in 2002 may present the aforementioned problem ofselection bias. In this respect, it is true that venture capital typically invests in highgrowth industries (such as ICT, biotech or the like), which present higher job creationrates than standard industries. Therefore, it follows that 30.5% average rate ought notto be compared with 0.7%.14 Germany (ENGEL, 2002), U.S.A. (JAIN and KINI, 1995; DÁVILA, FOSTER and GUPTA, 2003), Italy (BERTONI,COLOMBO and GRILLI, 2011) and Spain (ALEMANY and MARTÍ, 2005).15 See exhibit number 3 and 4 in the Annexes.16 Informe 2012, Op. cit. note 3, p. 17.17 Institut d’Estadística de Catalunya18 EVCA (2005), Employment Contribution of Private Equity and Venture Capital in Europe, p.19.19 Ibid. p. 22.20 EVCA (2002), Survey of the Economic and Social Impact of Venture Capital in Europe (2002), p. 6. 12
  • 13. VENTURE CAPITAL IN CATALONIAIt is submitted that there is some force on this argument, and in order to overcome itsshortcomings ASCRI21 sought a group of 171 comparable companies not financed byventure capital –similar industry code (NACE rev2), same Autonomous Community ifpossible, similar sales volume at the time of the venture capital investment andattempting that the company’s age, its assets volume and employment figures werenot too different.The results confirmed what has already been pointed out, namely that during theperiod 2005-2008 capital-backed firms in Spain created jobs at a rate of 10.7% while itscounterparts were destroying at 4.4%. Figure 5. Job average growth in Europe and in the United States of America Source: ASCRI (2012), Informe 2012: Impacto económico y social del capital riesgo, p.21More recent data was provided by the (American) National Venture CapitalAssociation, which proved that still during the worst years of the current financial andeconomic crisis venture-backed companies outperformed the total U.S. economy22.21 ASCRI (2011), Impacto económico y social del Capital Riesgo en España (2011), Madrid, p. 34. Anothersimilar study that tries to overcome the selection bias problem is ALEMANY and MARTÍ (2005), Unbiasedestimation of economic impact of venture capital backed firms, EFA 2004 Moscow Meetings.22 See exhibit 3 and 4 in the annexes. 13
  • 14. VENTURE CAPITAL IN CATALONIA4.3 Venture capital promotes investment and fosters innovationAccording to ASCRI, capital-backed companies invest more and, more importantly,their investing activity is not conditioned any more by their capacity to generateresources internally23. Furthermore, the same source shows that investment inresearch and development financed by venture capital increases the generation ofpatents, as well as their quality24.4.4 Venture capital speeds internationalisationIt is uncontroversial that in our current global and economically integrated world,internationalisation is a key success factor for an economy and its businesses, as it hasuncountable advantages, such as increase in size (and thus in productivity) andcompetitiveness, or decreased dependency on local markets (especially relevant inCatalonia nowadays, when internal demand in stagnant or even decreasing).In this respect, Catalonia is on the right track, as its exports have continuously beengrowing from 2007, with the exception of 2009. Annual evolution of Catalan exports (2007-2012) in thousand Euros2007 2008 2009 2010 2011 201249.678.311 50.514.433 41.460.903 48.866.294 54.954.921 58.282.900 Figure 6. Annual evolution of Catalan exports (2007-2012) Source: Acció10: www.acc10.catAs far as evidence is concerned, EVCA showed in their 2002 survey that “companies atall stages of development reported an increase in exporting activities following theventure capital investment”25. Not only did the number of exporting companiesincrease (from 37.2% to 59.7% in seed/start-up companies, and from 55% to 72% inexpansion stage ones) but also their exported output rose for those that were alreadyexporting at the time of the investment (a 78% increase in seed/start-up companies,and a 38% one in expansion stage firms).23 Informe 2012, Op. cit. note 3, p. 22.24 Ibid. p. 25.25 EVCA (2002) Survey of the Economic and Social Impact of Venture Capital in Europe (2002), p. 18. 14
  • 15. VENTURE CAPITAL IN CATALONIA4.5 Venture capital reduces business failure ratesAccording to ASCRI, three years after the beginning of their operations, the failure rateof new businesses participated by venture capital was 6%, whereas this figureincreased to 60% in case they were not capital-backed companies26.4.6 Venture capital favours the creation of a start-up ecosystemAll interviewed experts agreed that albeit there is no specific evidence for proving it, itis clear that venture capital favours the creation of a start-up ecosystem. The reasonfor this seems clear –most entrepreneurs will not dare to launch their own business ifthey know beforehand that very little firms will be able to finance them, help with themanagement of the venture and share their expertise.As it has already been pointed out, by raising new venture capital funds we can breakthe vicious cycle of lack of start-ups and entrepreneurs because there is no capital, andno capital because there is no place to invest.4.7 ConclusionMany more domestic and international studies have been carried out than thosementioned in this section, but for space issues it should be enough to highlight howrelevant venture capital is in becoming a “growth accelerator” for any economy,especially taking into account that relationship between size, productivity andinternationalisation is bidirectional –size enhances productivity and 27internationalisation, which on its turn enhance a bigger size .It would be important for our policy-makers to bear these data in mind, so that theycan help growing our national skimpy venture capital industry, to which now we turnto capture in a snapshot.26 ASCRI (2010), Impacto económico y social del Capital Riesgo en España, Madrid, p.10.27 CAREC (2012), Catalunya: Visió i objectius econòmics de futur, Barcelona, p. 99. 15
  • 16. VENTURE CAPITAL IN CATALONIA 5. The Venture Capital Industry in a Snapshot As aforementioned, ARD was the first modern venture capital firm in the world. Nevertheless, it was not until the 2000’s that venture capital arrived in Spain, quite later than in other European countries (1980’s) or Israel (1990’s). Yet, in less than thirteen years 42 newly incorporated companies have started to do “pure” venture capital28, as opposed to those that make both venture capital and other risk capital operations (such as private equity). According to expert Marcos Salas (partner at WebCapitalRiesgo), 23 of them have less than 7 years of life, and most have not even raised a second fund29. From the research we have conducted, it appears that about sixteen out of these 42 companies are active in Catalonia nowadays –Nauta Capital, Ysios Capital Partners, Caixa Capital Risk, Highgrowth Partners, Inveready Technology Investment Group, Telegraph Hill Group, Ona Capital Privat, Active Venture Partners, Alta Partners Capital, Riva y García Grupo Financiero, IESE Finaves, Innova 31, Wayra, Health Equity, Ingenia Capital, and Institut Català de Finances. As the overall industry, many of them started having a generalist profile, whereas the trend nowadays is to specialise. In order to analyse a further division of them, please see exhibit 1 in the annexes. The number of venture capital operations in Spain has constantly been increasing these last three years, whereas the total amount invested every year has not followed the same pattern. Note that data for 2012 will be launched by next April. The exact figures are the following: Amount (€ Million) NumberType of investment 2009 2010 2011 2009 2010 2011New investments 129,3 126,4 111,1 274 293 336Expansion of earlier investments 82,2 115,6 97,7 225 216 235 Total 211,5 242 208,8 499 509 571 Figure 7. Adapted from WebCapitalRiesgo (2011), El venture capital en España en 2011, Madrid,p.12 Companies from Madrid and Catalonia receive most of this investment, as it can be seen in the following table: 28 Webcapitalriesgo (2011), El venture capital en España en 2011, Madrid, p. 16. 29 SALAS (2009), Venture Capital en España: Evolución y principales cifras, p.2. 16
  • 17. VENTURE CAPITAL IN CATALONIA Amount (€ Million) NumberPlace of investment 2009 2010 2011 2009 2010 2011Catalonia 33,9 62,9 49,5 112 146 168Madrid 64,5 57,6 53,6 109 128 132 Total 98,4 120,5 103,1 221 274 300 Figure 8. Adapted from WebCapitalRiesgo (2011), El venture capital en España en 2011, Madrid, p.14 As it can be observed, Catalonia concentrated 22.5%, 28% and 29.5% of the total number of venture capital operations in Spain in 2009, 2010 and 2011 respectively. It has constantly been leading the Spanish ranking on the number of venture capital operations, which is typical from a society with large number of SMEs according to Enrique Tombas. In terms of total amount of money invested in Catalan companies, the proportions have been 16%, 26% and 23.7% in 2009, 2010 and 2011. In this context, the reader should note that venture capital is mainly a regional industry, following the American proverb “Don’t invest beyond where the bus can take you”. It means that most of the capital investment in Catalan companies is done by Catalan or Spanish funds, as there is the need to monitor and advice the management of capital-backed companies. According to expert Enrique Tombas, 83% of the venture capital offer is domestic and local. Therefore, it now seems clear why it is important to strengthen local venture capital industry, rather than just trying to get Catalan start- ups invested by foreign funds (which, of course, should also be pursued 30). All interview experts acknowledge that the industry has grown a lot since its inception and that it has come “to remain”. In this regard, Spanish venture capital portfolio amounts to €1,961 million, spread in 2,009 companies, which means that the average investment per company in the portfolio is 976,000€31. Madrid and Catalonia accumulated together 47% of the portfolio investment volume (€827 million), taking 24.1% and 22.8% of the portfolio respectively32. However, again, 30 In 2011, there were only four operations of venture capital by foreign funds in Spain, according to Webcapitalriesgo (2011), El venture capital en España en 2011, Madrid, p. 11. 31 Webcapitalriesgo (2011), El venture capital en España en 2011, Madrid, p. 16. 32 Ibid. p. 17. 17
  • 18. VENTURE CAPITAL IN CATALONIA Catalonia had a larger number of capital-backed companies than Madrid or any other region in Spain. Amount (€ Million) NumberPlace of investment 2009 2010 2011 2009 2010 2011Madrid 333,5 378,4 425,3 199 291 360Catalonia 261,2 379,7 401,8 275 398 473Total in Spain 137.144 1.690.7 1.764.8 1.414 1.784 1.961 Figure 9. Adapted from WebCapitalRiesgo (2011), El venture capital en España en 2011, Madrid, p.18 One of the most recurrent questions in venture capital is which is the moment in a company’s life when it is most difficult to find financing in Spain. According to WebCapitalRiesgo, the answer depends on whether it is given from the entrepreneur’s perspective or the investors’ one. However, their data shows two clear conclusions: predominance of operations below 500,000€ (84%) and lack of operations above €10 million. Whereas the former number suggests a possible overlap with business angels, the latter indicates an increasing difficulty in Spain to raise new funds and have successful disinvestments. These two points will be considered in the next section. Nevertheless, prior to turning to the next section two important points should be made. The first one is that albeit venture capital investment has increased throughout this last decade both in Spain and in Catalonia, its relative importance if compared to total risk capital investment (such as private equity) is low. The second one is that venture capital investment is still very low if compared with other Western countries, thus indicating that there is still a lot to do before considering the industry comparable to other economies. Regarding the first point, and as it can be seen from next graph, in Spain in 2010 and 2011 the core sector of leveraged operations (MBO/MBI33) had the highest concentration of total investment, with a 67,5% over the total, with a significant increase from 2009 (31,3%). The stage where the companies need other rounds of financing, the so-called expansion, holds the second position with a 26,3% of total investment but a 60,7% in number of operations (587). This phase includes both 33 Management Buy Out (MBO) and Management Buy in (MBI) are typical private equity operations. Whereas the former is a “form of acquisition where a companys existing managers acquire a large part or all of the company from either the parent company or from the private owners” (Wikipedia), the latter “occurs when a manager or a management team from outside the company raises the necessary finance, buys it, and becomes the companys new management” (Wikipedia”). 18
  • 19. VENTURE CAPITAL IN CATALONIA“bridge financing (company in the period of transition from being privately owned tobeing publicly quoted) and rescue and turnaround (existing business which hasexperienced trading difficulties, with a view to re-establishing prosperity)investment”.34 120,00% 100,00% Other 80,00% MBO/MBI 60,00% Replacement Expansion 40,00% Start up 20,00% Seed 0,00% 2009 2010 2011 Figure 10. Stage Distribution of amount invested in Spain (in percentage), 2009-2011 Source: adapted from WebCapitalRiesgoAs far as the second point is concerned, the next graph from the OECD shows howlittle venture capital is invested as percentage of GDP in Spain if compared with othercountries (as of 2009). This is one of the reasons why interviewed experts consider thatin Spain and in Catalonia we are still “playing on the third category” of venture capital.Amongst the most developed European countries, only Italy, Greece and Luxembourgare behind Spain. However, countries like Israel, the U.S., Sweden, Ireland or Belgiumhave between three and four times more venture capital than Spain.34 EVCA (2007), Guide on Private Equity and Venture Capital for Entrepreneurs, p. 14. 19
  • 20. VENTURE CAPITAL IN CATALONIA Figure 11. Venture capital as a percentage of GDP. Source: OECD (2011), Entrepreneurship at a Glance, OECD Publishing, Paris.The case of Israel is particularly noteworthy, since its macroeconomics data is fairlysimilar to Catalonia –it has seven million citizens and its GDP is around €200,000million. However, Israel has more listed companies in Nasdaq than the whole Europeand it has more start-ups than anywhere else in the world besides Silicon Valley.According to CAREC, this is the result “of their culture and history –unity andwillingness to assume risks; and the multicultural element. Israel is a country ofimmigrants and they are more prone to assuming risks. It is not a coincidence that halfof the start-ups in Silicon Valley were founded by immigrants”35.35 CAREC (2012), Catalunya: Visió i objectius econòmics de future, Barcelona, p.96. 20
  • 21. VENTURE CAPITAL IN CATALONIA6. Main Problems Faced by Venture Capital in CataloniaAs many other industries, venture capital is currently facing a difficult time inCatalonia. However, interviewed experts acknowledge that the economic and financialcrisis has not struck so badly what they have been building these last 10-15 years. Yet,there are some specific problems to venture capital development that prevent it tobecome a genuine driving force for the Catalan economy. In this section, we shallpresent the main ones in order to pave the way for the next section, where we shalloffer some potential solutions.6.1 Lack of Entrepreneurial CultureCatalonia has traditionally been one of the most entrepreneurial and prosperousregions in Spain. Indeed, it was the first industrialised region in the country in thenineteenth century and for a long time its factories supplied textile products toSpanish households and companies.Notwithstanding Catalonia is still considered a more entrepreneurial region that theSpanish average, evidence shows that Spaniards may be catching up with the allegedCatalan entrepreneurial mindset. Thus, the Total early-stage Entrepreneurial Activity(henceforth, TEA) rate, which is the percentage of 18-64 population who are either anascent entrepreneur or owner-manager of a new business, is used by the GlobalEntrepreneurial Monitor36 (henceforth, GEM) as an important proxy forentrepreneurial activity.According to this source, average TEA in Catalonia was 6.38% for the 2008-2012 period(available data), whereas in Spain it was 5.75% for the 2000-2011 period (Spain hasbeen part of the GEM reports since its very inception). Note, though, that TEAdecreased in Catalonia for three years before recovering a positive rate in 2011. For amore detailed ranking on entrepreneurial activity in Spain divided by regions, seeexhibit 5 in the annexes.However, Catalonia should not compare itself with the rest of Spain but with the mostentrepreneurial countries in the world, such as the United States or Norway. Thefollowing graph shows the evolution of the TEA from the last eleven years in Spain, the36 The Global Entrepreneurial Monitor project is an annual assessment of the entrepreneurial activity,aspirations and attitudes of individuals across a wide range of countries. It was initiated in 1999 as apartnership between London Business School and Babson College. In 2011 the project had an estimatedglobal budget of nearly USD $9 million. 21
  • 22. VENTURE CAPITAL IN CATALONIAUS and Norway. The reason to include Spain rather than Catalonia is that GEM’sdatabase can only compare states, as opposed to countries or regions. Figure 12. Evolution of TEA in the 2001-2012 period Source: Website of Global Entrepreneurship MonitorIn this context, it is worth noting that not all new companies are relevant for venturecapital purposes, since only firms that are somehow related to cutting-edgetechnologies are targeted by venture capitalists. In this sense, only 0.9% of newCatalan companies in 2010 (which makes 128 out of a total of 14,29837) had high R+Dintensity38, which reinforces the idea that venture capital lacks a technological start-ups environment on which to invest. One possible reason for this to happen is thatCatalan universities and research centres –typical sources in other countries of creativeideas subject to investment by venture capital- have not traditionally cooperated withcompanies in order to create and manage new products, mainly because “there is aproblem of language imbalance, incentives and speed between the two spheres”39.Yet, according to interviewed experts Felipe Muntades and Oriol Sans, the problem inthis context is not so much the lack of entrepreneurial spirit but the inability of many37 Institut d’Estadística de Catalunya38 Institut d’Estudis Regionals i Metropolitans de Barcelona (2011), 10 Global Entrepreneurship Monitor.Informe Ejecutivo Cataluña, Barcelona, p. 74.39 GARCÍA-RUIZ and BORONAT (2013), Catalunya Last Call, Editorial Viena, Barcelona. 22
  • 23. VENTURE CAPITAL IN CATALONIACatalan entrepreneurs to execute their projects and successfully bring them to themarketplace.On a different note, according to the White Paper on Entrepreneurship in Spain40people in the country (hence, including Catalans) prefer wage-earning jobs to self-employment -the latter is the preferred option for 40% of the people, compared with51% in France and 55% in the US. One of the reasons for this is probably that Spaniardsare in general risk-adverse (12%) if compared to Americans (39%) or British (21%). Ineffect, as the same source highlights, 65.5% of the Spanish youth consider that theyare not encouraged to develop new entrepreneurial projects because of theirinsecurity and fear of failure41. It is self-evident that this state of affairs does notfacilitate new companies to be born and thus reduces the ecosystem on which venturecapital operates.On the other hand, the Spanish and Catalan legal framework deter many great ideas tobecome companies potentially invested by venture capital. As the OECD rightly puts it,“[a] combination of opportunity, capabilities and resources does not necessarily leadto entrepreneurship if opportunity costs (e.g. forgone salary and loss of healthinsurance) and start-up costs outweigh the potential benefits. The regulatoryframework is a critical factor affecting countries’ entrepreneurial performance”42.According to this international organisation, Spain is among the most restrictivecountries in the world to start a business. The following sub-indicators make up the“starting a business” indicator: number of procedures to legally start and operate acompany, time required to complete each procedure (calendar days), cost required tocomplete each procedure (% of gross national income per capita), and paid-inminimum capital (% of gross national income per capita).40 Fundació Príncep de Girona (2011), White Paper on Entrepreneurship in Spain, Barcelona.41 Ibid. p. 16.42 OECD (2012), “Regulatory framework: Starting a business”, in Entrepreneurship at a Glance 2012,OECD Publishing, p. 106. 23
  • 24. VENTURE CAPITAL IN CATALONIAFigure 13. OECD (2012), “Regulatory framework: Starting a business”, in Entrepreneurship at a Glance 2012, OECD Publishing, p. 107Moreover, Spain is as well on the group of countries with most number of proceduresto start a business (ten).Figure 14. OECD (2012), “Regulatory framework: Starting a business”, in Entrepreneurship at a Glance 2012, OECD Publishing, p. 1076.2 Lack of Track Record and Difficult Access to New FundsAs it has been pointed out before, venture capital is a very recent activity in Cataloniaand in Spain. The first companies date from the early 2000’s, and the leading oneswere not founded until later –Nauta Capital in 2004 and Ysios Capital in 2007.Therefore, the fist funds have not been completely disinvested yet, which means thatbecause the cycle has not been completed the average return is still not know. This isthe so-called “lack of track record” problem.It is indeed a problem because, as experts point out, if there is no specific data on theexact financial return of venture capital it is more difficult to convince potential 24
  • 25. VENTURE CAPITAL IN CATALONIAinvestors to put their money into Catalan venture capital funds, which cannot makenew investments if they do not count with new and “fresh” money.Other additional problems for Catalan venture capital to raise new funds are thefollowing: (i) Spanish and Catalan pension funds and insurance companies do notinvest in venture capital, whilst foreign pension funds and insurance companiestypically invest in their home countries; (ii) saving banks, which have traditionally beenan important source of venture capital funding, are facing a huge restructure of theirindustry, so they invest most of their money into solving their own problems; (iii) bigpan-European funds do not invest in Spanish and Catalan venture capital.With regards to the insignificant investment from Spanish and Catalan pension funds inventure capital, it should be noted that Spanish pension funds count on 80,000 millionEuros43, 50,000 of which come from the individual system (the one contracted infinancial institutions) and the rest from the employment system (sponsored by somecompanies). However, in Spain only 1% of capital venture funds come from pensionfunds, whereas the European average is 15.6%44. Similar data comes from insurancecompanies: while 10% of the funds managed by European venture capital have itsorigin in insurance firms, this percentage is reduced to 0.5% in Spain45.6.3 Legal and Tax FrameworkIn Spain, the legal competence to legislate about the regulation and tax system ofventure capital lies on the Spanish central government. Therefore we shall examinethe current situation according to the Spanish Law, and not to the non-existent Catalanregulation.In this section, we intend to examine the legal regime of both potential players thatcan be affected by taxation –venture capitalists and the invested companies. As far theformer are concerned, they use the legal forms of Sociedades de Capital Riesgo (SCR)and Fondos de Capital Riesgo (FCR). With regards to the latter, Sociedades Anónimas(or SAs) and Sociedades de Responsabilidad Limitada (or SLs) are typically used.Recently, the Spanish venture capital regulation has been transformed through theLaw 25/2005 on Private equity and Venture Capital Entities (hereinafter also referred43 ASCRI (2012), Informe 2012, Madrid, p. 47.44 Ibid. p.47.45 Ibid. p.47. 25
  • 26. VENTURE CAPITAL IN CATALONIAas “the Law”), modified by the Law 2/2011. It provides these entities with an improvedlegal framework. Still, capital-backed companies are not offered the same advantagesor legal protection; hence a more flexible and modern legal framework should bepursued in order to achieve a level comparable to the neighbouring countries.Both SCRs and FCRs are structures governed by the Law. As it is stated in its generalexplanatory notes accompanying the legislation, the Law aims to “foster developmentof entities which are relevant in providing financing to companies” to keep up with thegrowth of the capital risk market and supporting the expansion of this kind ofinvestment.The Law defines the SCRs and FCRs as “those financial entities the main purpose ofwhich is the investment, on a temporary basis, in the share capital of companies whichfulfil a series of requirements”, the so-called Eligible Companies.The main differences between these two legal structures are that the SCRs arerequired to be incorporated as a SA with a minimum share capital of 1,200,000 Euros,while the form of a FCRs lacks of legal personality, and are therefore considered asseparate asset pools and are ensured a minimum share capital of 1,650,000 Euroswhich must be managed by a Gestora de Entidades de Capital Riesgo (articles 32 and33 of the Law).In Catalonia, the primary source of funds is managed by entities that have taken thelegal form of a Gestora de Entidades de Capital Riesgo totalling, in 2009, a 67.5%; whilea 32.5% was represented by several SCR entities. Figure 15. SCRs and “Sociedades Gestoras” in Catalonia, 1999-2009 Source: (2009), Datos de recursos captados y capitales totales de entidades con sede principal en Cataluña 26
  • 27. VENTURE CAPITAL IN CATALONIARegarding the tax treatment of the mentioned enacted Law, both legal forms aresubject to the corporate income tax with a 35% rate. Nevertheless, several taxconcessions have been granted to the mentioned entities in order to promote capitalrisk activities, by means of article 55 of the Royal Decree Law 4/2004, of March 5th, onCorporate Income tax.Capital risk entities will benefit from an exemption of 99% of the incomes obtainedthrough the transfer of their stake in the Eligible Companies (established in article 2 ofthis Law) provided that the transfer is executed from the second to the fifteenth yearfollowing the acquisition of the stake. Note, however that there are some restrictionsto this exemption46.Furthermore, dividends obtained by these entities are also exempt from any corporatetax, albeit the interest accrued “on the amount lent by the entities trough profit-sharing loans do not benefit from the special tax provisions introduced by the newlaw”47.In conclusion, the recent enacted tax law and its legal regime has had a significantimpact on the structuring of venture capital legal forms. Both SCRs and FCRs have beentransformed to an appealing instrument from a tax standpoint as their shareholdersbenefit from a privileged tax treatment.When it comes to capital-backed firms, they typically use as aforementioned the legalstructures available in Spain –Public Limited Companies (SA) and Private LimitedCompanies (SL). Both are limited liability corporations ruled by the Royal LegislativeDecree 1/2010, of July 2nd, on Capital Companies. It is required for the SAs a minimumshare capital amounting to 60,000 Euros and SLs must have a minimum share capital of3,000 Euros.46 ASCRI and Garrigues (2006), The new legal system for private equity & venture capital in Spain, p.6: “Ifthe entity in which a stake is held is subsequently listed on certain securities markets, the application ofthe exemption will be conditioned upon the VCE transferring the company in question within threeyears from the date on which such company was listed. The above notwithstanding, the exemption willnot apply in certain cases where there is a link between the VCE and the transferee or between the VCEand the party that sold it the stake”.47 PERROTTO and GÓMEZ (2007), Venture Capital and Private Equity, Butterworths Journal of InternationalBanking and Financial Law, p. 6. 27
  • 28. VENTURE CAPITAL IN CATALONIAWith respect to the capital gains tax, both legal forms are subject to the standardCorporate Income Tax rate and have no specific exemptions. Nevertheless, it issubmitted that when these SAs or SLs have been backed by venture capital it would berequired to have a specific tax treatment, as the positive effects for the whole societyhave been proved in section four.6.4 Exit problemsVenture capital funds and societies struggle in Catalonia to exit their investments andaccess to these future prospects can reassure investors to decide whether to investinitially or not. All in all, the venture capitalists’ capability to exit their investments is ameasure of its success.There are various exit methods for a prosperous start-up, as it can go throughout atrade sale, a secondary buyout, an IPO (Initial Public Offering), a write-off, the ownerscan buy back the company and reimburse the loans, etc.In this sense, there are three major concerns for the industry: (i) the time needed todisinvest is still too long (therefore investors are discouraged to invest in second roundinvestments); (ii) potential Spanish or Catalan buyer companies are in general termsnot large enough to buy capital-backed projects, and thus international buyers aresought by the capitalised company; and (iii) usually the financed companies are alsonot big enough to go public in the stock market (IPO).Regarding the first issue, venture capital firms’ lifecycle is as follows. During its firsttwo or three years of life, money is invested in a portfolio of several companies, and itis active during the following years. Since these investments have a temporary nature,the fund collects the revenues over the last years but the current economic downturnmight be the cause to stretch the time needed to disinvest.In 2011 the holding period in the US and Europe, from the initial venture capitalfinancing investment to an IPO, has been of 6.4 and 8.9 years respectively (roughlydoubling when compared to previous periods); and in the case of an M&A the timeneeded has been of 5.3 and 5.7 years. In consequence, an alarm has arisen for “early-stage funds, which are commonly experiencing 10-year holding periods”.4848 Ernst & Young (2011), Global Venture Capital insights and trends report 2011, p.13. 28
  • 29. VENTURE CAPITAL IN CATALONIA Figure 16. Time to M&A or IPO exit by region, 2002-2011 Source: Ernst & Young (2011), Global Venture Capital insights and trends report 2011, p.13In Spain, the average holding period in final divestments has decreased during the lastyear, from 5.4 in 2010 to 5.1 years in 2011. Still, venture capitalists and theirinvestments are locked49 for a longer period of time if compared with previous years,and the funds are less prone to invest into start-up businesses (venture capitalinvestments). Figure 17. Average holding period in final divestments in 2010 and 2011 in Spain. Source: ASCRI (2012), Survey 2012, p.18As far as the second issue is concerned, interviewed experts acknowledge that the“natural” buyer of a Catalan capital-backed firm would be a larger Spanish or Catalancompany, such as Telefónica or the like. However, it is stated that there are notenough of these big companies, and “trade sales have always been a second-best49 According to IBRAHIM (2012), The New Exit in Venture Capital, Vanderbilt Law Review: “investor lock-inmeans not only a situation of capital lock-in, but also the absence of a ready market where an investorcan sell her ownership interests to a third party”. 29
  • 30. VENTURE CAPITAL IN CATALONIAoption for start-ups due to their lower returns for investors”50. Thus, investors find itdifficult to look for a company, as there is no market for selling the business to a thirdparty.Clearly, venture capital needs to face this challenge by regulating a more adaptablestructure, which would allow investors a chance to have an easier exit; thereforelessening the current liquidity needs.50 IBRAHIM (2012), The New Exit in Venture Capital, Vanderbilt Law Review, p.9. 30
  • 31. VENTURE CAPITAL IN CATALONIA7. Some Suggestions on How to Foster Venture Capital in CataloniaSo far this paper has defined venture capital, it has proved its social and economicimpact, it has analysed the industry’s current situation in Catalonia and in Spain andhas highlighted some of the main problems it faces to become a genuine driving forcefor the Catalan economy. It is therefore now the moment to present solutions to theseproblems and try to make the industry benefit from its competitive advantages.Nevertheless, it is paramount to bear in mind that venture capital will only develop itsfull potential if it finds an attractive and stable environment in which to operate, sinceat the end of the day what private and institutional investors are looking for is a returnon their investment.7.1 Promote an Entrepreneurial CultureHaving an entrepreneurial culture would be a desirable state of affairs, since morestart-ups would be created and thus venture capital could have a larger pool ofcompanies on which to invest. However, it seems that this long-term goal could onlybe attained if the Catalan society changed its mindset on certain aspects: (i) movingfrom a culture in which security is the most desirable attribute in a job to havingcreativity and autonomy as valuable qualities in jobs; (ii) believing that a businessfailure51 is not a personal failure but a learning experience that will increase theprobability of success in the next entrepreneur’s activity; or (iii) improving thereputation of businessman and entrepreneurs and transforming it into sociallydesirable jobs, as “there is greater motivation to engage in entrepreneurial activitieswhen these activities are socially accepted and entrepreneurship is valued andadmired”52.In order to achieve this set of cultural and social beliefs it is submitted thatentrepreneurial education should be implemented and deepened in the three maineducational stages, namely primary and secondary school, university undergraduatelevel, and university graduate level and business schools. It would imply embracing thefamous quote: “the popular myth that had it that entrepreneurs are born, not made,has given way to a general consensus that says that entrepreneurship is a discipline,and that like any other discipline it can be learned”53.51 Note that 23.7% of new startups fail within two years, and only 37.3% of survive past their sixth year.Source: TIMMONS (1999), New Venture Creation: Entrepreneurship for the 21st Century, Homewood,Irwin.52 Fundació Príncep de Girona (2011), White Paper on Entrepreneurship in Spain, Barcelona, p.15. 31
  • 32. VENTURE CAPITAL IN CATALONIAMore specifically, more courses on entrepreneurship should be added to universityundergraduate degrees, extending its scope from business and economics degrees toother fields such as technical or health sciences degrees. Some Catalan universitiesoffer these modules, but often as elective courses rather than compulsory ones. Thiswould be of special importance for students from biotechnology or health sciencesbackgrounds, as it could help them incorporate their entrepreneurial activities into anindustry considered as strategic by all interviewed experts.Moreover, start-ups and venture capital should benefit from having two among thebest business schools in the world54. For instance, qualified managers from theseschools could help some of these capital-backed firms to increase revenues, grow andexpand internationally.In this sense, Barcelona should further exploit its international brand and positioningto attract entrepreneurs from other regions in the world in order to become anentrepreneurial hub. A foreseeable strategy would be one in which entrepreneurs’ andsocial’s interests were aligned and public and private agents cooperated to make thispossible. Hence, entrepreneurs would be seduced to come to the city not only for itsquality of life and excellent connectivity but also because they would see their ideasand projects grow hand in hand with the availability of both financial and operationalresources. This would certainly enhance entrepreneurial dynamism.An interesting benchmark in entrepreneurship for Catalonia is the one offered byIsrael, as all interviewed experts acknowledge. Its incubator program, initiated in 1991,currently has 24 incubators scattered throughout the country, many of which havebeen recently privatised55. The principal purpose of the technological incubator is tohelp entrepreneurs successfully implement and commercialize their projects.According to the Israeli Government’s website, the following services are provided toveteran Israelis and new immigrants alike: (i) assistance in determining thetechnological and marketing applicability of the idea and drawing up an R&D plan; (ii)assistance in obtaining the financial resources needed to carry out the project; (iii)assistance in forming and organizing an R&D team; (iv) professional and administrativecounseling, guidance, and supervision; (v) secretarial and administrative services,53 DRUCKER (1985), Innovation and Entrepreneurship: Practice and Principles, Harper and Row, New York.Quoted in Fundació Príncep de Girona (2011).54 th nd. According to the Financial Times, in 2013 IESE ranked 7 in the world and ESADE 2255 32
  • 33. VENTURE CAPITAL IN CATALONIAmaintenance, procurements, accounting, and legal advice; and (vi) assistance in raisingcapital and preparing for marketing.The Israeli incubator model is quite unique as it has three distinguishingcharacteristics, according to expert Vincent Heeringa56: (i) it is privately owned, whichmeans that incubators are run by fund managers drawn from venture capital firms andthey seek new start-ups from anywhere in the world; (ii) its deal structure –when theincubators managers like the look of an entrepreneur, they apply to receivegovernment funding in the form of a loan of up US$600,000 for two years, which isthen topped up by private sector angel money. It means private investors are involvedfrom the beginning, so these deals have to pass the angel investors tests before theyeven enter the incubator; (iii) royalties not equities –about 70% of some of theseincubators new startups come straight out of from university research. Theresearcher, whos leaving the safety net of the university to start the company, isgiven up to 50 percent of the new company in shares.Another benchmark for Catalonia in this area is provided by the program “Start UpChile”, which aims at recruiting international talent. This program’s goal is to attract1,000 entrepreneurs from 2010 to 2014 by providing them with US$40,000 of equity-free seed capital, and a temporary 1 year visa to develop their projects for six months,along with access to “the most potent social and capital networks in the country” 57.The quality of these entrepreneurs is guaranteed through its tough admission process,conducted by both Silicon Valley experts and a Chilean Innovation board.7.2 Attract New FundsThe solution to the problem of difficult access to new funds for the Catalan venturecapital industry is two-fold. On the one hand, only time will solve the lack of trackrecord of the first funds invested ten years ago. Once exact data on the average returnof these funds is available venture capital managers will have evidence on how muchreturn these had, and they will thus offer it to potential investors.On the other, experts acknowledge that new and different funds need to be raised inorder to keep the investment process, since traditional investors (Spanish savingbanks) have dried. In this paper we point out at three new potential institutionalinvestors –pension funds, insurance companies and social security funds. Nowadays,56 33
  • 34. VENTURE CAPITAL IN CATALONIAtheir money is mainly invested in major listed companies and sovereign debt (the caseof social security funds), but not in unlisted companies. As ASCRI points out, “the taxdeduction58 appears to have a perverse effect: the investor resigns to the immediateyield provided by the tax savings and does not demand an active management of thefunds contributed to the financial institution, aimed at seeking above-market yields”59.Therefore, it is submitted that an increased awareness of the advantages of adiversified portfolio will push customers to require from the financial institutions amore “active management”, so that they can obtain the double benefit –tax deductionand higher returns.Finally, it should be noted that according to Javier Ulecia, partner of Bullnet and vice-president of ASCRI, 30-40% of all Spanish venture capital funds come from the State.This means that public money has managed to attract new funds, thus generating agenuine leverage effect. It then makes sense that most experts support the idea ofintensifying this public-private collaboration. However, there is a clear disagreementwhen it comes to deciding whether the Catalan public-private collaboration should bebased on asymmetric returns, as venture capitalists demand and public managersrefuse. The concept of asymmetric returns is simple –private investors retain most ofthe returns (above the proportion of what they invested), while public investorsreceive a lower proportion of returns than the amount of money they invested. Thismodel has its origin in Israel and is nowadays being applied in Finland, Great Britain,the Netherlands and Poland. Although we do not have data to provide a valid position,we believe that further thought should be given to it, as it may be the clue to theproblem of attracting new funds to venture capital in Catalonia.7.3 Legal and tax frameworkAs mentioned, the recent legal amendments have allowed the Spanish venture capitalindustry to become as competitive as the most modern legal frameworks in otherEuropean countries. Therefore, we will focus on the measures that could benefit thecapital-backed, or start-ups, companies.If the Catalan government does not succeed in improving the legal conditions for earlystage companies, these will undoubtedly perform below their potential –instead of58 Under the Spanish law, there is a tax deduction in the income tax for citizens who contribute to theirown private pension. The rationale is to incentivise individuals to complement their public pension,which will not be able to guarantee them the same quality of life than the one they had before retiring.59 ASCRI (2012), Informe 2012, Madrid, p. 47. 34
  • 35. VENTURE CAPITAL IN CATALONIAfocusing on strategic issues they would need to deal with overcoming the payment oftaxes and employment regulation.It would be interesting to regulate a new legal status for “this new company whoseinnovative character justifies a more favourable treatment in its earlier stages, to allowthem to consolidate and grow”.60This potential reform should follow some of these principles: more flexibleadministrative and legal requisites for the new-born companies, financial resourceswhich have proved to be successful in other countries in order to attract foreign talentand help to increase the start-ups operational activity.According to experts61, the following are examples of measures which could beimplemented: (i) reducing social security contribution rates 62; (ii) implementing amonthly VAT return; (iii) a more favourable taxation system for the worker; (iii) allowto invest a percentage of the taxpayer’s annual income return (or “Declaración de larenta”) to entrepreneurship; (iv) establish a compensation for dismissal’s maximumamount; and (v) improving the recruitment time needed to attract foreigner talent.All in all, these measures should not be regulated as punctual actions, disconnectedbetween them; indeed it is needed a global renewal of the start-ups legal framework.7.4 Secondary markets and exportingAs the preceding section disclosed the venture capital’s exit situation, now this onestudies two possible solutions: the appearance of secondary markets and exporting.Exit markets play a significant role in the supply of capital. If investors can exit throughan IPO or a trade sale, they would be more willing to enhance a new flow of funds.Furthermore, they would be more likely to do so if they have “access to a secondary60 and Ministerio de Industria, Turismo y Comercio (2008), Foro de expertos en capital riesgo yTIC, p. 7261 SANTISO and CAPAPÉ (2011), Las 40 principales medidas para llevar a España a una economía deinnovación y emprendimiento.62 The level of the social security contribution the new firms have to pay when established will alsoinfluence their decision as it places an enormous burden on them. This social security coverage isrequired for both employees and self-employed, being the latest the ones who are willing to start a newcompany. According to the Spanish Social Security special regime for self-employment, the currentminimum base, as of 2013, is of 858.60 Euros. 35
  • 36. VENTURE CAPITAL IN CATALONIAmarket that provides transparency and structured framework for effective valuations;having a positive impact on funds allocated to early-stage investments”. 63As above indicated, for a young and small company it is difficult to access to the mainmarket – due to its size they have distinctive risk and liquidity needs as to companieslisted on the stock market – hence the only possibility to obtain more liquidity for theventure capital investment is through this secondary market, “offering an importantrelease valve for the increasing pressure on traditional exits”. 64There are several secondary markets in different European countries –AIM and PLUS(UK), ALTERNEXT (France, Holland, Belgium and Luxembourg), and the FIRST NORTH(Sweden, Finland, and Iceland). Spain soon followed its example when in 2009, theMAB (“Mercado Alternative Bursátil”) was created, understanding it as a “market forsmall cap companies looking to expand with a special set of regulations designedspecifically for them with costs and processes tailored to their particularcharacteristics”. 65The positive results for a start-up company if it uses this secondary market areobvious: strengthening of equity, increased turnover and it creates employment as wecan see from the following figures. Figure 18. A MAB companies’ assessment after their second year of activity (Source:, this secondary market has a whole range of benefits. Hence, it issubmitted that it should be recognized, developed and encouraged (the MAB only hasfour years of life) by government.63 ANDERSSON and NAPIER (2007), The role of Venture Capital, global trends and issues from a Nordicperspective, International Organization for Knowledge Economy and Enterprise Development, p. 3064 IBRAHIM (2012), The New Exit in Venture Capital, Vanderbilt Law Review, p. 1565 36
  • 37. VENTURE CAPITAL IN CATALONIAAs mentioned in the previous section, one of the most common exit strategies is atrade sale to a corporate investor66. However, neither Spain nor Catalonia have enoughbig companies willing to proceed with a buy-out. Therefore capital backed companieshave to look for international buyers.But how can we make a start-up company attractive for a potential internationalinvestor? After interviewing some experts, their answer is clear: Catalan companiesshould focus on exporting rather than concentrating their efforts on the internalmarket.Due to the current economic downturn, this is a key factor any capital backedcompany should consider in trying to attract global investments; as internationalexposure is gained and it makes no sense to constraint the company’s transactions tothe national market.Nowadays, exporting (and thus becoming global) is indispensable for the enduringsuccess of the company, as exemplified in numerous Catalan firms. One of the mostwell known examples, mentioned by some of the experts we interviewed, is Softonic.This is a company which “offers a vast [on-line] catalogue that includes hundreds ofthousands of programs”67, as its mission is to enhance people to use software.The company was founded by Tomás Diago’s in Catalonia in July 1997 after receiving aventure capital investment to start its operations. Just sixteen years later its sales havereached 45 million Euros and obtained a profit of 25 million Euros thanks to aninternational expansion. Recently, on the 3rd of March 2013, Softonic has sold a 30% ofits stake to the Swiss Fund Partner Group for 82.5 million Euros.Certainly, becoming more global through exports leverages the conditions that make acompany more attractive to international investors; therefore easing the possibility offinding an exit in the market.66 According to ASCRI, in 2011 there were 127 write offs and not a single Spanish IPO.67 37
  • 38. VENTURE CAPITAL IN CATALONIA8. ConclusionsInterviewed experts acknowledge that albeit venture capital is a quite recent activity inCatalonia, it has managed to develop a stable industry during these last fifteen years.Indeed, more than ten funds operate permanently in Catalonia (mostly concentratedin its capital, Barcelona), 473 Catalan capital-backed companies have €401.8 million onits equity financed by venture capital firms, Catalan venture capital firms are becomingpart of international networks, and specific successful stories (Vueling, Softonic,eDrems, Fractus, etc.) inspire other innovative companies to follow their lead.However, there are some strong drawbacks that deter the industry to fully developand become as successful as, say, Israel, with which we share many macroeconomicindicators. In this sense, it is the “underused economic growth factor” in our country.Some of these problems are the lack of entrepreneurial culture and execution capacityof good ideas, the lack of track record due to the short industry’s age and thus thedifficulty to raise new funds, the tax and legal framework of capital backed companies,and exit problems for the venture capitalists.This final thesis has suggested some specific solutions to allow the venture capitalindustry become a genuine economic development force. Amongst others, we wouldhighlight the need to build up our start-up incubator model similar to the Israeli one,to target international start-up managers and attract them to Barcelona, to increaseentrepreneurial education in scientific and technological universities, to create a moreflexible and favourable legal and tax framework for start-ups, or to financially supportsecondary markets.It would be interesting to further the research we have only started in this paper andmeasure and quantify the economic impact of these specific suggested measures. Forinstance, it would be relevant for policy-makers to know if a new and more favourablelegal and tax framework of technological start-ups would lead to an increase in thenumber of these companies, and whether this would ultimately lead to an increase ingovernment’s revenue. If the reduction in the tax rate was compensated by the largerpool of taxpayers, then there would be another reason for adopting these legalvehicles. 38
  • 39. VENTURE CAPITAL IN CATALONIA9. Annexes Exhibit 1. Major capital providers in Catalonia.Source: Acció (2013), XVIII Investment Forum. Fund Providers Catalogue, Barcelona, p.5 39
  • 40. VENTURE CAPITAL IN CATALONIAExhibit 2. CAREC (2012), Catalunya: Visió i objectius econòmics de futur, Barcelona, p. 117.Exhibit 3. National Venture Capital Association (2009), Venture Impact. The economicimportance of venture capital backed-companies for the us economy, 5th edition, p.8. 40
  • 41. VENTURE CAPITAL IN CATALONIAExhibit 4. National Venture Capital Association (2011), Venture Impact. The economicimportance of venture capital backed-companies for the us economy, 6th edition, p.2.Exhibit 5. Institut d’Estudis Regionals i Metropolitans de Barcelona (2011), 10 Global Entrepreneurship Monitor. Informe Ejecutivo Cataluña, Barcelona, p. 28 41
  • 42. VENTURE CAPITAL IN CATALONIA10. BibliographyBooks and reportsALEMANY and MARTÍ (2005), Unbiased estimation of economic impact of venture capitalbacked firms, EFA 2004 Moscow Meetings. Available at: and NAPIER (2007), The role of Venture Capital, global trends and issues froma Nordic perspective, International organization for knowledge economy andEnterprise development. Available at:,GLOBAL%20TRENDS%20AND%20ISSUES.pdfASCRI (2010), Impacto económico y social del Capital Riesgo en España, Madrid.Available at: (2011), Impacto económico y social del Capital Riesgo en España, Madrid.Available at: (2012), Informe 2012: Impacto económico y social del capital riesgo, Madrid.Available at: and Garrigues (2006), The new legal system for private equity & venture capitalin Spain. Available at: (2011), La dimensio empresarial a Catalunya. Situació, característiques,determinants i propostes, Barcelona. Available at: (2012), Catalunya: Visió i objectius econòmics de futur, Barcelona.Available at: and JOHAN (2009), Venture Capital and Private Equity Contracting: AnInternational Perspective, Elsevier Science. 42
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