Discover more from The Realistic Optimist
Ecosystem Deep Dives #9: Portugal - Start-up Eldorado
Having been badly hit by the 2008 crisis and a painful EU bail-out in 2011, Portugal has completely rebranded itself as a digital nomad paradise.
Ecosystem Deep Dives is a weekly series in which I analyze and compare different start-up ecosystems from around the world. If you enjoy and gain value from my work, feel free to share and subscribe!
Flipping the script
Portugal's recent history has been in strong contrast with its idyllic location, picturesque landscape, and colorful culture. Following decades of military dictatorship that ended in 1974 following the so-called Carnation Revolution, Portugal's young democracy was hit hard by the global 2008 financial crisis. Severe austerity measures put in place following the 2011 EU financial bailout led most of its talent and young population to leave the country in search of better opportunities abroad. However, in recent years, Portugal's image on the international scene has changed drastically, as a result of strong improvements on the economic and social front. Today, Portugal is often revered as a "digital nomad" paradise, an enviable title in the era of remote work.
With a population of 10 million, a GDP per capita of around $35,000 and arguably one of the countries with the best weather in the world, Portugal also differentiates itself through its strong standards of living. Portugal is recognized as the 3rd most peaceful country in the world, behind Iceland and New Zealand. It has excellent connectivity, with 96% of the country enjoying 4G coverage. The country is seen as a great mix between EU stability, relatively cheap cost of living, high national English proficiency, and a great entry point into the EU's massive 500 million+ consumer market.
Ancient buildings that used to house daring seafarers now host ambitious and outward looking entrepreneurs, giving birth to an eclectic mix of traditional architecture and new technology, united by the same desire to build something bigger than oneself. Slowly but surely, Lisbon is turning into a sunnier, cheaper and dare I say "Europeaner" version of London. All of these preconditions, combined with public and private initiatives to boost Portugal's start-up scene, have led Portugal's start-up ecosystem to enjoy exciting, steady and extremely promising growth throughout the past decade.
The taste of success
Although the Portuguese start-up ecosystem is still not on par with the likes of Paris or Berlin, the country already boasts 7 unicorns, impressive fundraising rounds, and a large diversification of the sectors its startups innovate in. This is likely due to the small size of the Portuguese local market, which leads Portuguese founders to design globally scaleable products from the get-go. In fact, 75% of Portuguese start-ups opt for a B2B model, specializing in creating enterprise products. This trend can be clearly seen in the list of the country's list of unicorns so far:
Farftech: An online luxury fashion retail platform.
Outsystems: Low-code platform that enables businesses to develop, deploy, and manage enterprise-grade apps.
Talkdesk: An enterprise contact center platform that allows companies to make the customer experience a competitive advantage.
Feedzai: Risk management tools to prevent fraud and money laundering in transactions.
Remote: Offers international payroll, benefits, and compliance services for employees and contractors.
Sworth Health: A digital musculoskeletal therapy provider that pairs its members with a licensed physical therapist.
Anchorage: A digital asset platform offering custody, trading, and financing services, as well as staking and governance.
The Portuguese incubator/co-working scene is also very active with more than 150 incubators spread out throughout the country. Between 2016 and 2020, the number of incubators grew 40%. A couple of the top incubators in Portugal include Beta-i, Fintech House and Fabrica de Startups. Special mention for Bright Pixels, which identifies as a "start-up studio", which means they specialize in building ventures from the ground up, leaning on a solid network of corporate and institutional partners as long as strong, in-house technical teams. This new type of incubator is poised to gain traction in recent years, as the corporate world is quickly realizing the need for innovation due to drastic change in consumer habits amongst Gen-Z. In parallel, the country is quickly growing its international tech appeal through the organizations of successful events such as the WebSummit and Get in the Ring.
Portugal also has the specificity of having a fairly geographically distributed ecosystem, compared to other countries where the capital and/or the biggest city concentrate almost all start-up activity. The country's main "start-up cities" include Lisbon, Porto, Braga and Coimbra. Actually, it is argued some of the country’s best incubators (IPN, UPTEC, Start-up Braga) are located outside of Lisbon. From my discussion with local actors, I found out most talent is located in the north, explaining why many great start-ups emerge from Porto.
As explained previously, the small size of the Portuguese market forces founders to think global from the get-go. As seen in the list of its unicorns, Portuguese founders tend to focus on B2B models, which differs from most ecosystems we've covered so-far. Indeed, while Indonesia and Colombia have either ride-hailing or food delivery apps as their first unicorns, Portugal's first unicorns differentiate themselves by directly tapping into highly technical markets.
While the sectors Portuguese start-ups innovate is highly diversified, fintech (financial technology) still takes the lion's share of the market. The Portuguese fintech sector is consolidated under the umbrella of Portugal Fintech, an organization carrying out lobbying, incubation and research efforts to promote the advancement of financial technology in the country. The country's first fintech unicorn, Feedzai, will likely only accelerate that trend. Being a country with a "leftist" governmental tradition, Portuguese entrepreneurs are also exploring the interesting intersection between social/environmental impact and deeptech such as AI (artificial intelligence) and ML (machine learning).
In terms of the funding landscape Portugal’s local VC scene is starting to heat up, with prominent Portuguese VC's such as Indico Capital, Faber Ventures and Shilling VC setting their sights on Portuguese as well as global start-ups. Having local VC funds connected globally can only be a boost for the ecosystem. Local angel syndicates such as Olisipo Way and Core Angels are also providing well-needed funding for the often dry "pre-seed" sector. For more in-depth resources on the local investor scene and deal-flow in Portugal, I recommend you check out this fantastic article by Felipe Ávila da Costa, who delves into it with depth and precision.
In 2020, Portuguese start-ups raised 365 million euros across 146 different rounds. In comparison to other EU countries, Portugal is ahead of Denmark and just behind Italy. Interesting to note is the fact that large rounds raised by Portuguese start-ups are generally done through a foreign entity (Delaware C-Corp most of the time) in order to facilitate the process for foreign investors. While I used to think this type of procedure might be bad for small ecosystems, I'm starting to realize that having a single, standard framework to raise money (the Delaware C-Corp) might unlock more global capital into emerging markets rather than trying to get each country to develop its own, unique fundraising legal instruments. In Portugal, this process enabled world-renown Sequoia Capital to make its first investment into a Portuguese start-up, Remote.
Another interesting element of the Portuguese start-up scene to catch my eye is the concept of "public VC's", in other words, governments acting as VC's to fill the funding gaps left by traditional investors. In Portugal, two main initiatives fall within that range: the $200M co-investment fund supported by the EU and the Portuguese government, as well as Portugal Ventures, a VC operated by state-owned bank Banco Português de Fomento.
The organization Start-up Portugal is what holds all of this ecosystem together, as it acts as the coordinator of the country’s incubators, events and lobbying efforts. It is responsible for implementing the National Strategy for Entrepreneurship, the government’s roadmap to boost the ecosystem.
Through the two public VC's mentioned above as well as other initiatives, the Portuguese government is definitely on the side of start-ups, even though many founders still criticize high taxes and inefficient bureaucratic procedures.
Two encouraging recent developments can be found in the election of Carlos Moedas, a former EU Innovation Officer, as mayor of Lisbon. Moedas openly stated his desire to turn Lisbon into a "unicorn factory", setting the tone for his term. Furthermore, it was recently announced that Portugal will be spearheading the newly formed Europe Start-up Nations Alliance (ESNA), which aims to spur collaboration between EU governments to harmonize start-up legislation across the continent. The role and purpose of ESNA can be compared to the work i4Policy carries out in Africa. Government efforts to attract foreign talent/capital such as the Golden Visa and the Start-up visa are also laudable, although 98% of founders are still Portuguese. On the contrary, Estonia’s similar policies led to 20% of Estonian-based start-ups being founded by foreigners.
Corporate & Academia
More and more emerging markets are realizing the importance of involving the corporate and the academic sector in the development of their national start-up ecosystem. Corporates bring operational capabilities, ties to the government, and are in dire need of innovation themselves. On the other hand, the role of academia is important not only on the R&D side, but also by preparing students for the updated version of the job market.
In Portugal, the involvement of corporates and academic institutions is taking form nicely. On the corporate side, the Santander Bank (although the bank is originally Spanish) has been encouraging and financing innovative ideas through initiatives such as Santander X Tomorrow Challenge. Galp, a major oil/gas Portuguese conglomerate has been encouraging the green energy transition through the launch of its Upcoming Incubator. While all of these initiatives are good on the surface, one always has to look into the total impact of the company as a whole before immediately "clearing its name" because it launched a "social impact accelerator". In other words, a lot of oil and gas companies launch "green" incubators while continuing to extract more and more fossil fuels from our planet. What should be measured is the social/environmental impact of a corporation as a whole, not only a shiny initiative it launches (although that might be the start to more).
On the academic front, MIT Portugal Program and the Center for Technological Innovation and Entrepreneurship at the Catolica Lisbon University are both two great examples of bridges between the academic and the start-up world. The need for technical talent in Portugal, although not as acute as in other countries, is still one of the painpoints founders often cite as a barrier to success. Tech-centered education initiatives such as 42Lisboa, Upskill and Academia de Codigo are working to fill that gap.
The Portuguese ecosystem is undoubtedly poised for more growth, especially as the EU seeks to harmonize and "de-fractionalize" its internal market, which with its 500 million users, strong middle class, and high internet connectivity, has the potential to be an extremely attractive market for the next Portuguese unicorns.
On the local side, more efforts have to be undertaken to simplify and reduce the tax regime on start-ups, a complaint nearly 70% of Portuguese start-ups share. The government has also been implementing measures to digitalize its bureaucracy, through initiatives such as Simplex and Empresa na Hora (business in an hour), but founders seem to demand more.
All in all, Portugal will very likely continue to reap the fruits from its dynamic ecosystem, beautiful landscape and internationally-minded culture. One of the big open-ended questions is whether Portugal will benefit from the rise of remote work, with international talent moving to Portugal, or suffer from it, with local Portuguese talent deciding to work (from Portugal) for higher-paying jobs from the US/Canada/Europe.
All article sources are available here.
Thank you for reading! If you enjoyed this piece, feel free to share it and subscribe to Ecosystem Deep Dives to receive a new ecosystem analysis, every Tuesday, delivered to your inbox.