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

Universitat Pompeu Fabra

Venture Capital in Catalonia
The Underused Economic Growth Factor

Oriol Valentí i Vidal (NIA: 67328)
Silvia Corbella Baselga (NIA: 67124)

Final Thesis
14 March 2013

VENTURE CAPITAL IN CATALONIA

Abstract: 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.

Key words: venture capital, Catalonia, economic growth, investment, job creation.

2


Table of Contents
1. Introduction .................................................................................................................. 4
2. Conceptual Map, Methodology and Limitations .......................................................... 5
3. What is venture capital? ............................................................................................... 6
4. 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 ............................................................................................................. 15
5. The Venture Capital Industry in a Snapshot ............................................................... 16
6. 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 ........................................................................................................ 28
7. 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 ........................................................................ 35
8. Conclusions ................................................................................................................. 38
9. Annexes ...................................................................................................................... 39
10. Bibliography .............................................................................................................. 42

3


1. Introduction

What do Catalan companies Vueling, eDreams, Softonic or Privalia have in common?
They all were, in their beginnings, partially financed by venture capital funds, which
not only provided them with the necessary capital to operate but also offered their
expertise, connections and management support. In short, these funds helped to fill
the so-called “equity gap” –the period in companies’ life where it is of utmost difficulty
to find financing, usually because there are no hard assets against which to secure
banks’ 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, it
seems that the traditional forces of economic growth have been exhausted. This paper
supports the opinion that innovation (in whatever form) and specialisation in certain
industries can help the Catalan economy to recover and lay stronger foundations for
future growth. In this sense, venture capital can play a decisive role, since not only it
provides financing to companies where no credit is available, but also it makes
companies grow and contributes to job creation.

Indeed, numerous reports acknowledge the strategic need of promoting these
financing vehicles, especially in times where access to bank credit is very limited. We
could mention, among others, “Catalonia: Vision and Future Economic Objectives”,
from the Advisory Board for Economic Recovery and Growth (Consell Assessor per a la
Reactivació Econòmica i el Creixement, in Catalan) or the “Program of Municipal
Action” of the City of Barcelona. With this short paper we wish to contribute to the
trend 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 explain
the theoretical framework that encapsulates this research, as well as the methodology
employed and its possible limitations. In section three we briefly define venture capital
and put it into the perspective of companies’ lifecycle. Section four reviews part of the
extensive 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 the
venture capital industry in Catalonia and in Spain. Section six analyses the main
problems faced by the Catalan venture capital industry according to interviewed
experts. In section seven we try to offer some possible suggestions on how to foster
venture capital in Catalonia. Last but not least, we conclude in the last section with
some insights of what can be learned from this paper and suggest possible further
research on this area.
4


2. Conceptual Map, Methodology and Limitations

This final thesis should be contextualised in the broader perspective of the finance,
marketing and strategic courses taught at Universitat Pompeu Fabra. However, this
paper purports to establish a holistic approach to venture capital in Catalonia, rather
than analysing it using different self-contained compartments. Therefore, finance,
marketing and strategic management concepts and assumptions are employed
throughout the thesis without explicit mention.

As far as methodology is concerned, research is typically divided into primary and
secondary. Primary research generates direct new information, whereas secondary
research is based upon already existing data. Both the former and the latter can be
quantitative and qualitative. Due to limitations of time (10 weeks) and space (35
pages), we have used primary qualitative information and secondary quantitative data.

With regards to primary qualitative information, we have conducted a set of personal
and phone call interviews with recognised experts, the names and positions of which
can be found in a table below. Regarding secondary quantitative data, we have read,
analysed and summarised numerous reports available on the Internet, and consulted
specialised websites and blogs. The full list is available on the bibliography, and when
specific sources are used they are mentioned in footnotes.

Finally, it should be noted that this paper suffers from certain limitations, amongst
which we would highlight the selection bias (section four), the lack of specific studies
about the state of the venture capital industry in Catalonia (section five), and the
assumption that Catalonia can legislate in certain areas the competence of which is the
Spanish 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


3. What is venture capital?

In 1946, ADR (America Research & Development Corp.) was the first modern venture
capital firm incorporated in the world. Its founders were MIT president Compton,
Massachusetts Investors Trust chairman Griswold, Federal Reserve Bank of Boston
president Flanders, and Harvard Business School professor Doriot. The goal of the
company was to “finance commercial applications of technologies that were
developed during World War II”1.

After the creation of this firm a venture capital industry flourished in the USA, but it
was not until the late 1970’s that the industry really grew2. During these past decades
the activity of equity funding has reached an enormous importance in the U.S., helping
to 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 the
terms private equity and business angels, which are other financing means to invest in
non-quoted companies. In this regard, the boundaries between these concepts are
somehow 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 risk
companies, thus helping them to develop and succeed thanks to its financing,
management help, experience and connections. Hence, venture capital is a specific
type of finance, a cluster of private equity, which capitalises companies trough equity
participation overcoming its funding gap in early stages.

Note that private equity and venture capital are not the same. According to the
European Venture Capital Association (henceforth, EVCA), private equity is the
“provision of equity capital by financial investors- over the medium or long term- to
non quoted companies with high growth potential” 3. It thus includes the financing of
companies in the successive phases of its development.

On the other hand, venture capital is “a subset of private equity and refers to equity
investment for the launch, early development, or expansion of a business”4. Its main

1 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


objective is to back up entrepreneurs who are seeking to find capital to start a business
idea, therefore focusing mainly on start-up companies.

Within the earliest stages or seed companies, the common funding sources are the
business angels, considered as “wealthy individuals who typically contribute seed
capital, advice and support for businesses in which themselves are experienced” 5.
These are considered part of a more informal risk capital market. As with venture
capitalists, business angels do not only provide capital, but they offer their business
management 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 usually
invests at the “start-up” stage, when the business plan is already done and the product
is 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. 29

Once established what venture capital is, we shall examine its lifecycle and
mechanisms through an analysis of the different stages an investment can undertake.

The venture capital business model engages diverse participants: “entrepreneurs who
need funding; investors who want high returns; investment bankers who need

5 ZIDER (1998), How venture capital works, 76 Harvard Business Review 6, p. 138

7


companies to sell; and the venture capitalists who make money for themselves by
making a market for the other three”6.

Figure 3. How the venture capital industry works
Source: ZIDER (1998), 76 Harvard Business Review 6, p. 137

It is distributed into 4 main phases, taking into account that there are many variants of
the basic deal structure –but the logic is always the same– and can be viewed as the
following cycle:

a. Creation of a fund

Once 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, which
gather capital from subscribed investors for a certain period of time defined in its
internal regime.

Without any doubt, fundraising is the main setback for this industry specially
weakened by the economic crisis. International investors are not willing to invest in the
Spanish or Catalan market, due to lower expected returns; and the national ones have
nearly vanished.

As can be seen from figure 4, during the year 2011 a total of 2.4 billion euros were
raised, witnessing a decrease of a 25% compared to the previous year.

6 Ibid., p. 135.

8


Figure 4. New funds raised and investment committed
Source: ASCRI (2012), Informe, p. 14

b. Investing the fund

The second stage starts when the expected amount of capital is raised and its
managers target start-ups to invest in. Usually venture capital investors look for early
stage firms with several characteristics: “liquidity and growth indicator such as near
term, 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, interviewed
experts agree that if 2-3 invested companies from a 10 companies portfolio end up
being successful projects they would get a “more than decent” return, since the profits
they would make in their disinvestment would more than compensate the losses on
the other companies. Hence, in order to obtain very high returns it is needed to invest
innovative companies, as value creation must come 100% for operational reasons and
in a short period of time.

c. Managing the investment

In the management phase, venture capitalists undertake an active role, acting “as a
coach for the company’s management to increase the value of the investment” 8 and
planning exit strategies bearing in mind the business’ future disinvestment.

7 Madison Park Group (2011), Guide to venture capital, p. 9

8LEBHERZ (2010), The Venture Capital Cycle and the History of Entrepreneurial Financing, GRIN
Verlag, p. 11.

9


From the perspective of the entrepreneur, there is pressure on his company to have
certain rates of return; thus making the “company heavily financially driven”9 .

d. Disinvestment and redistribution

In this last phase, venture capitalists disinvest in capital backed firms and distribute the
return obtained up to the investors who created the fund.

Venture capitalists benefit from capital gains, as “investee entrepreneurial firms
typically lack cash flows to pay interest on debt and dividends on equity” 10, when they
exit from the capital backed companies; therefore exits are essential in venture capital
cycle.

According to several authors, there are four usual divestment exits: (i) initial public
offering (IPO), where the company goes public on a stock exchange; (ii) acquisition by
another company; (iii) management buyout, when the entrepreneur repurchases the
venture capitalists’ stake; or the worst case scenario, (iv) a write- off, which is the
liquidation of the company.

9 Ibid., p. 12.

10CUMMING and JOHAN (2009), Venture Capital and Private Equity Contracting: An International
Perspective, Elsevier Science, p. 581

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4. Economic and Social Impact of Venture Capital

It is uncontested among scholars and practitioners that venture capital has a great
economic 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 look
at the main arguments and figures put forward by those that argue so. The underlying
rationale for doing so is to stress that albeit venture capital still plays a limited role in
the 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 private
sectors. The following section presents two arguable drawbacks. The first one is that
we extrapolate to our firms what happens with companies from other regions in the
world, since there are no specific studies for the Catalan economy. The second one
refers 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-technological
industries which behave differently.

4.1 Venture capital makes companies grow

In the global marketplace, companies need to attain a certain size in order to survive
and compete11. However, the Catalan economy has traditionally been characterized by
the high number of SMEs. In this sense, in 2005 the percentage of firms that earned
more than 50 million Euros compared to the total number of firms that earned at least
one million was much lower in Catalonia (12%) than in other European countries with
similar dimension and number of inhabitants, such as Finland (28%), Belgium (40%) or
Sweden (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 this
respect, during the period 2005-2008 (hence, including the first year of the economic
crisis) 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 and
profitability read the very interesting report La dimension empresarial a Catalunya. Situació,
característiques, determinants i propostes (December 2011), Consell Assessor per a la Reactivació
Econòmicai 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


Similar studies have been conducted in other parts of the world14 15 with the same
conclusions –after venture capital invest in firms, their earnings grow significantly
more than in similar companies not backed by venture capital. As the Asociación
Española de Entidades de Capital-Riesgo (henceforth, ASCRI) suggests, one of the main
reasons for this to happen could be that venture capital speeds the introduction
process of new products16.

4.2 Venture capital contributes to job creation

In these dramatic times of unbearable unemployment rates (23.94% in Catalonia, as of
February 201317), it is particularly important to foster industries and create tools that
contribute to job creation. Venture capital does it at a faster rate than non-backed
firms, especially in their initial stages and in technological industries. According to the
European Private Equity and Venture Capital Association (henceforth, EVCA)18,
employment in the surveyed venture-backed companies increased by an average of
30.5% per year between 1997 and 2005. As they put it, it is around forty times the
average annual growth rate of total employment in the EU 25 (0.7%). This figure rises
up to 62.3% (yearly!) in university spin-offs19. Another way to see it is as follows: every
capital-backed firm in the seed or start-up stage created an average of 46 jobs per
company between 1996 and 200120.

However, data used by EVCA in 2002 may present the aforementioned problem of
selection bias. In this respect, it is true that venture capital typically invests in high
growth industries (such as ICT, biotech or the like), which present higher job creation
rates than standard industries. Therefore, it follows that 30.5% average rate ought not
to 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 Catalunya

18
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


It is submitted that there is some force on this argument, and in order to overcome its
shortcomings ASCRI21 sought a group of 171 comparable companies not financed by
venture capital –similar industry code (NACE rev2), same Autonomous Community if
possible, similar sales volume at the time of the venture capital investment and
attempting that the company’s age, its assets volume and employment figures were
not too different.

The results confirmed what has already been pointed out, namely that during the
period 2005-2008 capital-backed firms in Spain created jobs at a rate of 10.7% while its
counterparts 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.21

More recent data was provided by the (American) National Venture Capital
Association, which proved that still during the worst years of the current financial and
economic 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. Another
similar study that tries to overcome the selection bias problem is ALEMANY and MARTÍ (2005), Unbiased
estimation of economic impact of venture capital backed firms, EFA 2004 Moscow Meetings.

22
See exhibit 3 and 4 in the annexes.

13


4.3 Venture capital promotes investment and fosters innovation

According to ASCRI, capital-backed companies invest more and, more importantly,
their investing activity is not conditioned any more by their capacity to generate
resources internally23. Furthermore, the same source shows that investment in
research and development financed by venture capital increases the generation of
patents, as well as their quality24.

4.4 Venture capital speeds internationalisation

It 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 has
uncountable advantages, such as increase in size (and thus in productivity) and
competitiveness, or decreased dependency on local markets (especially relevant in
Catalonia nowadays, when internal demand in stagnant or even decreasing).

In this respect, Catalonia is on the right track, as its exports have continuously been
growing from 2007, with the exception of 2009.

Annual evolution of Catalan exports (2007-2012) in thousand Euros
2007 2008 2009 2010 2011 2012
49.678.311 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.cat

As far as evidence is concerned, EVCA showed in their 2002 survey that “companies at
all stages of development reported an increase in exporting activities following the
venture capital investment”25. Not only did the number of exporting companies
increase (from 37.2% to 59.7% in seed/start-up companies, and from 55% to 72% in
expansion stage ones) but also their exported output rose for those that were already
exporting 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


4.5 Venture capital reduces business failure rates

According to ASCRI, three years after the beginning of their operations, the failure rate
of new businesses participated by venture capital was 6%, whereas this figure
increased to 60% in case they were not capital-backed companies26.

4.6 Venture capital favours the creation of a start-up ecosystem

All interviewed experts agreed that albeit there is no specific evidence for proving it, it
is clear that venture capital favours the creation of a start-up ecosystem. The reason
for this seems clear –most entrepreneurs will not dare to launch their own business if
they know beforehand that very little firms will be able to finance them, help with the
management of the venture and share their expertise.

As it has already been pointed out, by raising new venture capital funds we can break
the vicious cycle of lack of start-ups and entrepreneurs because there is no capital, and
no capital because there is no place to invest.

4.7 Conclusion

Many more domestic and international studies have been carried out than those
mentioned in this section, but for space issues it should be enough to highlight how
relevant venture capital is in becoming a “growth accelerator” for any economy,
especially taking into account that relationship between size, productivity and
internationalisation is bidirectional –size enhances productivity and
27
internationalisation, which on its turn enhance a bigger size .

It would be important for our policy-makers to bear these data in mind, so that they
can help growing our national skimpy venture capital industry, to which now we turn
to 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


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) Number
Type of investment 2009 2010 2011 2009 2010 2011
New investments 129,3 126,4 111,1 274 293 336
Expansion 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


Place of investment 2009 2010 2011 2009 2010 2011
Catalonia 33,9 62,9 49,5 112 146 168
Madrid 64,5 57,6 53,6 109 128 132
Total 98,4 120,5 103,1 221 274 300

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

31

32
Ibid. p. 17.

17


Catalonia had a larger number of capital-backed companies than Madrid or any other
region in Spain.
Place of investment 2009 2010 2011 2009 2010 2011
Madrid 333,5 378,4 425,3 199 291 360
Catalonia 261,2 379,7 401,8 275 398 473
Total in Spain 137.144 1.690.7 1.764.8 1.414 1.784 1.961

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 company's 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 company's new management” (Wikipedia”).

18


“bridge financing (company in the period of transition from being privately owned to
being publicly quoted) and rescue and turnaround (existing business which has
experienced 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 WebCapitalRiesgo

As far as the second point is concerned, the next graph from the OECD shows how
little venture capital is invested as percentage of GDP in Spain if compared with other
countries (as of 2009). This is one of the reasons why interviewed experts consider that
in 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 Luxembourg
are behind Spain. However, countries like Israel, the U.S., Sweden, Ireland or Belgium
have 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


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 fairly
similar to Catalonia –it has seven million citizens and its GDP is around €200,000
million. However, Israel has more listed companies in Nasdaq than the whole Europe
and 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 and
willingness to assume risks; and the multicultural element. Israel is a country of
immigrants and they are more prone to assuming risks. It is not a coincidence that half
of 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


6. Main Problems Faced by Venture Capital in Catalonia

As many other industries, venture capital is currently facing a difficult time in
Catalonia. However, interviewed experts acknowledge that the economic and financial
crisis 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 to
become a genuine driving force for the Catalan economy. In this section, we shall
present the main ones in order to pave the way for the next section, where we shall
offer some potential solutions.

6.1 Lack of Entrepreneurial Culture

Catalonia has traditionally been one of the most entrepreneurial and prosperous
regions in Spain. Indeed, it was the first industrialised region in the country in the
nineteenth century and for a long time its factories supplied textile products to
Spanish households and companies.

Notwithstanding Catalonia is still considered a more entrepreneurial region that the
Spanish average, evidence shows that Spaniards may be catching up with the alleged
Catalan entrepreneurial mindset. Thus, the Total early-stage Entrepreneurial Activity
(henceforth, TEA) rate, which is the percentage of 18-64 population who are either a
nascent entrepreneur or owner-manager of a new business, is used by the Global
Entrepreneurial Monitor36 (henceforth, GEM) as an important proxy for
entrepreneurial 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 has
been part of the GEM reports since its very inception). Note, though, that TEA
decreased in Catalonia for three years before recovering a positive rate in 2011. For a
more detailed ranking on entrepreneurial activity in Spain divided by regions, see
exhibit 5 in the annexes.

However, Catalonia should not compare itself with the rest of Spain but with the most
entrepreneurial countries in the world, such as the United States or Norway. The
following graph shows the evolution of the TEA from the last eleven years in Spain, the

36
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 a
partnership between London Business School and Babson College. In 2011 the project had an estimated
global budget of nearly USD $9 million.

21


US and Norway. The reason to include Spain rather than Catalonia is that GEM’s
database 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 Monitor

In this context, it is worth noting that not all new companies are relevant for venture
capital purposes, since only firms that are somehow related to cutting-edge
technologies are targeted by venture capitalists. In this sense, only 0.9% of new
Catalan companies in 2010 (which makes 128 out of a total of 14,29837) had high R+D
intensity38, 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 that
Catalan universities and research centres –typical sources in other countries of creative
ideas subject to investment by venture capital- have not traditionally cooperated with
companies in order to create and manage new products, mainly because “there is a
problem of language imbalance, incentives and speed between the two spheres”39.

Yet, according to interviewed experts Felipe Muntades and Oriol Sans, the problem in
this context is not so much the lack of entrepreneurial spirit but the inability of many

37
Institut d’Estadística de Catalunya
38
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


Catalan entrepreneurs to execute their projects and successfully bring them to the
marketplace.

On a different note, according to the White Paper on Entrepreneurship in Spain40
people 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 with
51% in France and 55% in the US. One of the reasons for this is probably that Spaniards
are in general risk-adverse (12%) if compared to Americans (39%) or British (21%). In
effect, as the same source highlights, 65.5% of the Spanish youth consider that they
are not encouraged to develop new entrepreneurial projects because of their
insecurity and fear of failure41. It is self-evident that this state of affairs does not
facilitate new companies to be born and thus reduces the ecosystem on which venture
capital operates.

On the other hand, the Spanish and Catalan legal framework deter many great ideas to
become companies potentially invested by venture capital. As the OECD rightly puts it,
“[a] combination of opportunity, capabilities and resources does not necessarily lead
to entrepreneurship if opportunity costs (e.g. forgone salary and loss of health
insurance) and start-up costs outweigh the potential benefits. The regulatory
framework is a critical factor affecting countries’ entrepreneurial performance”42.

According to this international organisation, Spain is among the most restrictive
countries 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 a
company, time required to complete each procedure (calendar days), cost required to
complete each procedure (% of gross national income per capita), and paid-in
minimum 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


Figure 13. OECD (2012), “Regulatory framework: Starting a business”, in Entrepreneurship at a
Glance 2012, OECD Publishing, p. 107

Moreover, Spain is as well on the group of countries with most number of procedures
to start a business (ten).

Figure 14. OECD (2012), “Regulatory framework: Starting a business”, in Entrepreneurship at a
Glance 2012, OECD Publishing, p. 107

6.2 Lack of Track Record and Difficult Access to New Funds

As it has been pointed out before, venture capital is a very recent activity in Catalonia
and in Spain. The first companies date from the early 2000’s, and the leading ones
were 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 that
because the cycle has not been completed the average return is still not know. This is
the so-called “lack of track record” problem.

It is indeed a problem because, as experts point out, if there is no specific data on the
exact financial return of venture capital it is more difficult to convince potential

24


investors to put their money into Catalan venture capital funds, which cannot make
new investments if they do not count with new and “fresh” money.

Other additional problems for Catalan venture capital to raise new funds are the
following: (i) Spanish and Catalan pension funds and insurance companies do not
invest in venture capital, whilst foreign pension funds and insurance companies
typically invest in their home countries; (ii) saving banks, which have traditionally been
an important source of venture capital funding, are facing a huge restructure of their
industry, so they invest most of their money into solving their own problems; (iii) big
pan-European funds do not invest in Spanish and Catalan venture capital.

With regards to the insignificant investment from Spanish and Catalan pension funds in
venture capital, it should be noted that Spanish pension funds count on 80,000 million
Euros43, 50,000 of which come from the individual system (the one contracted in
financial institutions) and the rest from the employment system (sponsored by some
companies). However, in Spain only 1% of capital venture funds come from pension
funds, whereas the European average is 15.6%44. Similar data comes from insurance
companies: while 10% of the funds managed by European venture capital have its
origin in insurance firms, this percentage is reduced to 0.5% in Spain45.

6.3 Legal and Tax Framework

In Spain, the legal competence to legislate about the regulation and tax system of
venture capital lies on the Spanish central government. Therefore we shall examine
the current situation according to the Spanish Law, and not to the non-existent Catalan
regulation.

In this section, we intend to examine the legal regime of both potential players that
can be affected by taxation –venture capitalists and the invested companies. As far the
former 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 the
Law 25/2005 on Private equity and Venture Capital Entities (hereinafter also referred
43
ASCRI (2012), Informe 2012, Madrid, p. 47.

44
Ibid. p.47.

45
Ibid. p.47.

25


as “the Law”), modified by the Law 2/2011. It provides these entities with an improved
legal framework. Still, capital-backed companies are not offered the same advantages
or legal protection; hence a more flexible and modern legal framework should be
pursued 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 general
explanatory notes accompanying the legislation, the Law aims to “foster development
of entities which are relevant in providing financing to companies” to keep up with the
growth of the capital risk market and supporting the expansion of this kind of
investment.

The Law defines the SCRs and FCRs as “those financial entities the main purpose of
which is the investment, on a temporary basis, in the share capital of companies which
fulfil a series of requirements”, the so-called Eligible Companies.

The main differences between these two legal structures are that the SCRs are
required 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 as
separate asset pools and are ensured a minimum share capital of 1,650,000 Euros
which must be managed by a Gestora de Entidades de Capital Riesgo (articles 32 and
33 of the Law).

In Catalonia, the primary source of funds is managed by entities that have taken the
legal form of a Gestora de Entidades de Capital Riesgo totalling, in 2009, a 67.5%; while
a 32.5% was represented by several SCR entities.

Figure 15. SCRs and “Sociedades Gestoras” in Catalonia, 1999-2009
Source: webcapitalriesgo.com (2009), Datos de recursos captados y capitales totales de
entidades con sede principal en Cataluña

26


Regarding the tax treatment of the mentioned enacted Law, both legal forms are
subject to the corporate income tax with a 35% rate. Nevertheless, several tax
concessions have been granted to the mentioned entities in order to promote capital
risk activities, by means of article 55 of the Royal Decree Law 4/2004, of March 5th, on
Corporate Income tax.

Capital risk entities will benefit from an exemption of 99% of the incomes obtained
through the transfer of their stake in the Eligible Companies (established in article 2 of
this Law) provided that the transfer is executed from the second to the fifteenth year
following the acquisition of the stake. Note, however that there are some restrictions
to this exemption46.

Furthermore, dividends obtained by these entities are also exempt from any corporate
tax, 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 new
law”47.

In conclusion, the recent enacted tax law and its legal regime has had a significant
impact on the structuring of venture capital legal forms. Both SCRs and FCRs have been
transformed to an appealing instrument from a tax standpoint as their shareholders
benefit from a privileged tax treatment.

When it comes to capital-backed firms, they typically use as aforementioned the legal
structures available in Spain –Public Limited Companies (SA) and Private Limited
Companies (SL). Both are limited liability corporations ruled by the Royal Legislative
Decree 1/2010, of July 2nd, on Capital Companies. It is required for the SAs a minimum
share capital amounting to 60,000 Euros and SLs must have a minimum share capital of
3,000 Euros.

46
ASCRI and Garrigues (2006), The new legal system for private equity & venture capital in Spain, p.6: “If
the entity in which a stake is held is subsequently listed on certain securities markets, the application of
the exemption will be conditioned upon the VCE transferring the company in question within three
years from the date on which such company was listed. The above notwithstanding, the exemption will
not apply in certain cases where there is a link between the VCE and the transferee or between the VCE
and the party that sold it the stake”.

47
PERROTTO and GÓMEZ (2007), Venture Capital and Private Equity, Butterworths Journal of International
Banking and Financial Law, p. 6.

27


With respect to the capital gains tax, both legal forms are subject to the standard
Corporate Income Tax rate and have no specific exemptions. Nevertheless, it is
submitted that when these SAs or SLs have been backed by venture capital it would be
required to have a specific tax treatment, as the positive effects for the whole society
have been proved in section four.

6.4 Exit problems

Venture capital funds and societies struggle in Catalonia to exit their investments and
access to these future prospects can reassure investors to decide whether to invest
initially or not. All in all, the venture capitalists’ capability to exit their investments is a
measure of its success.

There are various exit methods for a prosperous start-up, as it can go throughout a
trade sale, a secondary buyout, an IPO (Initial Public Offering), a write-off, the owners
can buy back the company and reimburse the loans, etc.

In this sense, there are three major concerns for the industry: (i) the time needed to
disinvest is still too long (therefore investors are discouraged to invest in second round
investments); (ii) potential Spanish or Catalan buyer companies are in general terms
not large enough to buy capital-backed projects, and thus international buyers are
sought by the capitalised company; and (iii) usually the financed companies are also
not big enough to go public in the stock market (IPO).

Regarding the first issue, venture capital firms’ lifecycle is as follows. During its first
two or three years of life, money is invested in a portfolio of several companies, and it
is 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 downturn
might be the cause to stretch the time needed to disinvest.

In 2011 the holding period in the US and Europe, from the initial venture capital
financing investment to an IPO, has been of 6.4 and 8.9 years respectively (roughly
doubling when compared to previous periods); and in the case of an M&A the time
needed 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”.48

48
Ernst & Young (2011), Global Venture Capital insights and trends report 2011, p.13.

28


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.13

In Spain, the average holding period in final divestments has decreased during the last
year, from 5.4 in 2010 to 5.1 years in 2011. Still, venture capitalists and their
investments 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 capital
investments).

Figure 17. Average holding period in final divestments in 2010 and 2011 in Spain.
Source: ASCRI (2012), Survey 2012, p.18

As 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 Catalan
company, such as Telefónica or the like. However, it is stated that there are not
enough of these big companies, and “trade sales have always been a second-best

49
According to IBRAHIM (2012), The New Exit in Venture Capital, Vanderbilt Law Review: “investor lock-in
means not only a situation of capital lock-in, but also the absence of a ready market where an investor
can sell her ownership interests to a third party”.

29


option for start-ups due to their lower returns for investors”50. Thus, investors find it
difficult to look for a company, as there is no market for selling the business to a third
party.

Clearly, venture capital needs to face this challenge by regulating a more adaptable
structure, which would allow investors a chance to have an easier exit; therefore
lessening the current liquidity needs.

50
IBRAHIM (2012), The New Exit in Venture Capital, Vanderbilt Law Review, p.9.

30


7. Some Suggestions on How to Foster Venture Capital in Catalonia

So far this paper has defined venture capital, it has proved its social and economic
impact, it has analysed the industry’s current situation in Catalonia and in Spain and
has highlighted some of the main problems it faces to become a genuine driving force
for the Catalan economy. It is therefore now the moment to present solutions to these
problems 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 its
full potential if it finds an attractive and stable environment in which to operate, since
at the end of the day what private and institutional investors are looking for is a return
on their investment.

7.1 Promote an Entrepreneurial Culture

Having an entrepreneurial culture would be a desirable state of affairs, since more
start-ups would be created and thus venture capital could have a larger pool of
companies on which to invest. However, it seems that this long-term goal could only
be attained if the Catalan society changed its mindset on certain aspects: (i) moving
from a culture in which security is the most desirable attribute in a job to having
creativity and autonomy as valuable qualities in jobs; (ii) believing that a business
failure51 is not a personal failure but a learning experience that will increase the
probability of success in the next entrepreneur’s activity; or (iii) improving the
reputation of businessman and entrepreneurs and transforming it into socially
desirable jobs, as “there is greater motivation to engage in entrepreneurial activities
when these activities are socially accepted and entrepreneurship is valued and
admired”52.

In order to achieve this set of cultural and social beliefs it is submitted that
entrepreneurial education should be implemented and deepened in the three main
educational stages, namely primary and secondary school, university undergraduate
level, and university graduate level and business schools. It would imply embracing the
famous 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


More specifically, more courses on entrepreneurship should be added to university
undergraduate degrees, extending its scope from business and economics degrees to
other fields such as technical or health sciences degrees. Some Catalan universities
offer these modules, but often as elective courses rather than compulsory ones. This
would be of special importance for students from biotechnology or health sciences
backgrounds, as it could help them incorporate their entrepreneurial activities into an
industry considered as strategic by all interviewed experts.

Moreover, start-ups and venture capital should benefit from having two among the
best business schools in the world54. For instance, qualified managers from these
schools could help some of these capital-backed firms to increase revenues, grow and
expand internationally.

In this sense, Barcelona should further exploit its international brand and positioning
to attract entrepreneurs from other regions in the world in order to become an
entrepreneurial hub. A foreseeable strategy would be one in which entrepreneurs’ and
social’s interests were aligned and public and private agents cooperated to make this
possible. Hence, entrepreneurs would be seduced to come to the city not only for its
quality of life and excellent connectivity but also because they would see their ideas
and projects grow hand in hand with the availability of both financial and operational
resources. This would certainly enhance entrepreneurial dynamism.

An interesting benchmark in entrepreneurship for Catalonia is the one offered by
Israel, as all interviewed experts acknowledge. Its incubator program, initiated in 1991,
currently has 24 incubators scattered throughout the country, many of which have
been recently privatised55. The principal purpose of the technological incubator is to
help entrepreneurs successfully implement and commercialize their projects.
According to the Israeli Government’s website, the following services are provided to
veteran Israelis and new immigrants alike: (i) assistance in determining the
technological 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 administrative
counseling, 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 22

55
http://www.investinisrael.gov.il/NR/exeres/2EC10169-510E-4A60-80F6-BAFD466F7DED.htm

32


maintenance, procurements, accounting, and legal advice; and (vi) assistance in raising
capital and preparing for marketing.

The Israeli incubator model is quite unique as it has three distinguishing
characteristics, according to expert Vincent Heeringa56: (i) it is privately owned, which
means that incubators are run by fund managers drawn from venture capital firms and
they seek new start-ups from anywhere in the world; (ii) its deal structure –when the
incubators managers like the look of an entrepreneur, they apply to receive
government funding in the form of a loan of up US$600,000 for two years, which is
then topped up by private sector angel money. It means private investors are involved
from the beginning, so these deals have to pass the angel investors' tests before they
even enter the incubator; (iii) royalties not equities –about 70% of some of these
incubators' new startups come straight out of from university research. The
researcher, who's leaving the safety net of the university to start the company, is
given up to 50 percent of the new company in shares.

Another benchmark for Catalonia in this area is provided by the program “Start Up
Chile”, which aims at recruiting international talent. This program’s goal is to attract
1,000 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 Funds

The solution to the problem of difficult access to new funds for the Catalan venture
capital industry is two-fold. On the one hand, only time will solve the lack of track
record of the first funds invested ten years ago. Once exact data on the average return
of these funds is available venture capital managers will have evidence on how much
return 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 in
order to keep the investment process, since traditional investors (Spanish saving
banks) have dried. In this paper we point out at three new potential institutional
investors –pension funds, insurance companies and social security funds. Nowadays,

56
http://www.idealog.co.nz/blog/2011/11/whats-so-good-about-israels-incubators

57
http://startupchile.org

33


their money is mainly invested in major listed companies and sovereign debt (the case
of social security funds), but not in unlisted companies. As ASCRI points out, “the tax
deduction58 appears to have a perverse effect: the investor resigns to the immediate
yield provided by the tax savings and does not demand an active management of the
funds contributed to the financial institution, aimed at seeking above-market yields”59.
Therefore, it is submitted that an increased awareness of the advantages of a
diversified portfolio will push customers to require from the financial institutions a
more “active management”, so that they can obtain the double benefit –tax deduction
and 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 a
genuine leverage effect. It then makes sense that most experts support the idea of
intensifying this public-private collaboration. However, there is a clear disagreement
when it comes to deciding whether the Catalan public-private collaboration should be
based on asymmetric returns, as venture capitalists demand and public managers
refuse. The concept of asymmetric returns is simple –private investors retain most of
the returns (above the proportion of what they invested), while public investors
receive a lower proportion of returns than the amount of money they invested. This
model 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 the
problem of attracting new funds to venture capital in Catalonia.

7.3 Legal and tax framework

As mentioned, the recent legal amendments have allowed the Spanish venture capital
industry to become as competitive as the most modern legal frameworks in other
European countries. Therefore, we will focus on the measures that could benefit the
capital-backed, or start-ups, companies.

If the Catalan government does not succeed in improving the legal conditions for early
stage companies, these will undoubtedly perform below their potential –instead of

58
Under the Spanish law, there is a tax deduction in the income tax for citizens who contribute to their
own 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


focusing on strategic issues they would need to deal with overcoming the payment of
taxes and employment regulation.

It would be interesting to regulate a new legal status for “this new company whose
innovative character justifies a more favourable treatment in its earlier stages, to allow
them to consolidate and grow”.60

This potential reform should follow some of these principles: more flexible
administrative and legal requisites for the new-born companies, financial resources
which have proved to be successful in other countries in order to attract foreign talent
and help to increase the start-ups operational activity.

According to experts61, the following are examples of measures which could be
implemented: (i) reducing social security contribution rates 62; (ii) implementing a
monthly VAT return; (iii) a more favourable taxation system for the worker; (iii) allow
to invest a percentage of the taxpayer’s annual income return (or “Declaración de la
renta”) to entrepreneurship; (iv) establish a compensation for dismissal’s maximum
amount; and (v) improving the recruitment time needed to attract foreigner talent.

All in all, these measures should not be regulated as punctual actions, disconnected
between them; indeed it is needed a global renewal of the start-ups legal framework.

7.4 Secondary markets and exporting

As the preceding section disclosed the venture capital’s exit situation, now this one
studies 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 through
an 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 secondary

60
Red.es and Ministerio de Industria, Turismo y Comercio (2008), Foro de expertos en capital riesgo y
TIC, p. 72
61
SANTISO and CAPAPÉ (2011), Las 40 principales medidas para llevar a España a una economía de
innovación y emprendimiento.
62
The level of the social security contribution the new firms have to pay when established will also
influence their decision as it places an enormous burden on them. This social security coverage is
required for both employees and self-employed, being the latest the ones who are willing to start a new
company. According to the Spanish Social Security special regime for self-employment, the current
minimum base, as of 2013, is of 858.60 Euros.

35


market that provides transparency and structured framework for effective valuations;
having a positive impact on funds allocated to early-stage investments”. 63

As above indicated, for a young and small company it is difficult to access to the main
market – due to its size they have distinctive risk and liquidity needs as to companies
listed on the stock market – hence the only possibility to obtain more liquidity for the
venture capital investment is through this secondary market, “offering an important
release valve for the increasing pressure on traditional exits”. 64

There 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, the
MAB (“Mercado Alternative Bursátil”) was created, understanding it as a “market for
small cap companies looking to expand with a special set of regulations designed
specifically for them with costs and processes tailored to their particular
characteristics”. 65

The positive results for a start-up company if it uses this secondary market are
obvious: strengthening of equity, increased turnover and it creates employment as we
can see from the following figures.

Figure 18. A MAB companies’ assessment after their second year of activity
(Source: www.bolsasymercados.es)

Undoubtedly, this secondary market has a whole range of benefits. Hence, it is
submitted that it should be recognized, developed and encouraged (the MAB only has
four years of life) by government.

63
ANDERSSON and NAPIER (2007), The role of Venture Capital, global trends and issues from a Nordic
perspective, International Organization for Knowledge Economy and Enterprise Development, p. 30

64 IBRAHIM (2012), The New Exit in Venture Capital, Vanderbilt Law Review, p. 15

65 http://www.bolsasymercados.es/mab/ing/marcos.htm

36


As mentioned in the previous section, one of the most common exit strategies is a
trade sale to a corporate investor66. However, neither Spain nor Catalonia have enough
big companies willing to proceed with a buy-out. Therefore capital backed companies
have to look for international buyers.

But how can we make a start-up company attractive for a potential international
investor? After interviewing some experts, their answer is clear: Catalan companies
should focus on exporting rather than concentrating their efforts on the internal
market.

Due to the current economic downturn, this is a key factor any capital backed
company should consider in trying to attract global investments; as international
exposure is gained and it makes no sense to constraint the company’s transactions to
the national market.

Nowadays, exporting (and thus becoming global) is indispensable for the enduring
success of the company, as exemplified in numerous Catalan firms. One of the most
well 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 of
thousands 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 a
venture capital investment to start its operations. Just sixteen years later its sales have
reached 45 million Euros and obtained a profit of 25 million Euros thanks to an
international expansion. Recently, on the 3rd of March 2013, Softonic has sold a 30% of
its stake to the Swiss Fund Partner Group for 82.5 million Euros.

Certainly, becoming more global through exports leverages the conditions that make a
company more attractive to international investors; therefore easing the possibility of
finding an exit in the market.

66
According to ASCRI, in 2011 there were 127 write offs and not a single Spanish IPO.
67
http://en.softonic.com/about

37


8. Conclusions

Interviewed experts acknowledge that albeit venture capital is a quite recent activity in
Catalonia, it has managed to develop a stable industry during these last fifteen years.
Indeed, more than ten funds operate permanently in Catalonia (mostly concentrated
in its capital, Barcelona), 473 Catalan capital-backed companies have €401.8 million on
its equity financed by venture capital firms, Catalan venture capital firms are becoming
part 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 develop
and become as successful as, say, Israel, with which we share many macroeconomic
indicators. 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 capacity
of good ideas, the lack of track record due to the short industry’s age and thus the
difficulty 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 capital
industry become a genuine economic development force. Amongst others, we would
highlight 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 increase
entrepreneurial education in scientific and technological universities, to create a more
flexible and favourable legal and tax framework for start-ups, or to financially support
secondary markets.

It would be interesting to further the research we have only started in this paper and
measure and quantify the economic impact of these specific suggested measures. For
instance, it would be relevant for policy-makers to know if a new and more favourable
legal and tax framework of technological start-ups would lead to an increase in the
number of these companies, and whether this would ultimately lead to an increase in
government’s revenue. If the reduction in the tax rate was compensated by the larger
pool of taxpayers, then there would be another reason for adopting these legal
vehicles.

38


9. Annexes

Exhibit 1. Major capital providers in Catalonia.
Source: Acció (2013), XVIII Investment Forum. Fund Providers Catalogue, Barcelona, p.5

39


Exhibit 2. CAREC (2012), Catalunya: Visió i objectius econòmics de futur, Barcelona, p.
117.

Exhibit 3. National Venture Capital Association (2009), Venture Impact. The economic
importance of venture capital backed-companies for the us economy, 5th edition, p.8.

40


Exhibit 4. National Venture Capital Association (2011), Venture Impact. The economic
importance 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


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44


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Websites

www.bolsasymercados.es/mab/ing/marcos.htm

www.en.softonic.com/about

www.idealog.co.nz/blog/2011/11/whats-so-good-about-israels-incubators

www.investinisrael.gov.il/NR/exeres/2EC10169-510E-4A60-80F6-BAFD466F7DED.htm

www.startupchile.org

45

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