Feature | Tech startups look to Lisbon as Brexit rattles London’s scene

The Lisbon Web Summit took place in November

Back in 2012, Jaime Jorge did something few of his Portuguese compatriots ever did: He turned down a job at Google in London. Jorge, then a 24-year-old software developer, chose to start his own enterprise instead. Five years later, Codacy, the company he co-founded with Joao Caxaria, uses algorithms to automatically correct mistakes in software code for scores of businesses worldwide, including PayPal and Adobe.

They’ve never looked back. “Instead of working 18 hours a day for someone else, we did this cool project for ourselves,” Jorge says at a cafe in Baixa, Lisbon’s historic district. “We had an alternative.”

That’s something new in a small nation long beset with a stagnant economy and a stressed banking industry. For years, Portugal’s best and brightest bolted for plum jobs at global consulting firms such as Accenture or tech giants like Google. Those brave enough to start their own tech companies almost always decamped for London, where a mix of British creativity, government support, and venture capital had fostered a bustling startup scene. Half the investments in European fintech startups from 2011 to 2016 went to British companies, according to CB Insights, a New York research firm.

Now a confluence of forces is leading entrepreneurs to build their companies at home. Thanks to cloud computing and open source software, it’s easier and cheaper than ever to assemble digital platforms anywhere. And universities such as the Instituto Superior Técnico in Lisbon are teaching students the art of entrepreneurship rather than just grooming them for careers in multinational corporations. Besides, London is one of the most expensive cities in the world in which to run a business; a rank-and-file software developer there earns three times what a coder makes in Portugal, according to a report by Balderton Capital in London.

In 2012, Portuguese entrepreneur Carlos Silva and his partner, Jeff Lynn, were setting up an equity crowdfunding platform called Seedrs in the U.K. capital. They opted to base their software development team in Lisbon. “I knew there was untapped engineering talent here, and from a cost perspective it would be far more efficient than setting up in London,” Silva says.

As a result, tech hubs are taking root in unlikely locales across Europe—in Barcelona, Munich, Vienna, even Brno, the Czech Republic’s second-biggest city. In Lisbon, ventures have sprung up—ranging from Hole19, an international social network for golfers, to Uniplaces, which lets college students book housing across Europe. A 2016 study backed by Allianz Kulturstiftung, the German insurance company’s foundation, ranked Lisbon as the fifth-best-performing startup community in Europe, ahead of such stalwarts as Stockholm and Dublin.

Portugal’s tech scene is still tiny, with VCs investing USD18.5 million in nine deals there last year, according to Preqin, a global investment research company. But that’s a sixfold jump from 2015, and Portuguese fintech firms are already making waves globally. Feedzai, backed by Citigroup’s venture arm, uses machine learning to automatically spot fraud for clients in Europe and the U.S. CrowdProcess has developed an artificial intelligence program called James that enables hedge funds and banks to predict when fixed income assets will default.

Now comes Brexit. While Britain’s decision to quit the EU probably won’t trigger a tech exodus from London, it may accelerate startup formation elsewhere. Losing access to the European single market would cloud the strategic growth plans of founders who’d intended to use the U.K. as a springboard for expansion in Europe. Losing the freedom-of-movement rights that enable EU citizens to settle in the U.K. with minimal fuss may hurt, too. More than 40 percent of the founders of British startups earned university degrees outside the country, according to Balderton.

The uncertainty around Brexit is already doing damage. In 2016 venture investing in British technology companies fell 15 percent, to £3.6 billion ($4.4 billion), the first drop in seven years, according to Preqin. Investors have canceled or delayed funding in at least 30 British fintech startups since the June 23 referendum, says Innovate Finance, a London trade group. In a speech on Jan. 17, Prime Minister Theresa May promised a “smooth, orderly” departure, but she also pledged to take the U.K. out of the single market. So Brexit-bred volatility has only begun.

Brexit could help EU members close the gap in the startup game. In January, France kicked off an initiative called the French Tech Ticket that will grant 70 foreign entrepreneurs (and their families) residence permits, a year in one of the country’s 41 incubators, and €45,000 to cover expenses. In April telecom billionaire Xavier Niel plans to open Europe’s biggest accelerator, with space for 1,000 startups, in a refurbished Paris train station. Likewise, national and regional authorities in Italy, Portugal, and Spain have adopted a combination of tax incentives and grant programs to stimulate startup hubs.

Yet these endeavors could stumble if they can’t stoke that indefinable spark that animates Silicon Valley and London’s Silicon Roundabout. Starting a tech venture and winning seed-round funding is so straightforward these days that it’s become a rite of passage for many business grads. It’s far harder to turn “pre-revenue” companies into thriving enterprises worthy of investment five to six years in. When this happened in California in the ’90s and ’00s, it spawned a generation of serial entrepreneurs, tens of thousands of jobs, and unprecedented wealth. While Europeans, desperate for growth, are trying to follow suit, they won’t transform their economies unless they match the hype of startup creation with the staying power of an ecosystem.

The Portuguese certainly have the promotional part of the equation down. In November more than 50,000 techies descended on Lisbon for the 2016 Web Summit, a kind of Davos for geeks. On opening night, João Vasconcelos, secretary of state for industry, unveiled a €200 million fund to co-invest alongside VCs in local startups and foreign companies that relocate to the country. Then Vasconcelos, who’s known as “the Godfather” in Portugal’s tech circles, asked more than 150 local founders to come on stage. As cannons filled the air with confetti and balloons dropped from the rafters, Codacy’s Jorge beamed alongside Vasconcelos and Prime Minister António Costa to the cheers of thousands of attendees. When it comes to strategy, Portuguese startups have a knack for expanding internationally early in their development, a trait rooted in the seafaring nation’s diminutive size and history as a trading power. “We have our own identity,” Vasconcelos says. “For centuries we’ve gone abroad. The Portuguese entrepreneur is born with a global mindset.”

They’re also living in an economy that hasn’t grown more than 1 percent annually since 2007. “The genesis of this whole scene was the financial crisis and the lack of jobs,” says Stephan Morais, an executive board member at Caixa Capital, a Lisbon-based VC and private equity firm.

The epicenter of Lisbon’s startup community is a six-story building located between a body-piercing parlor and a cafe in Baixa, an 18th century-era district of storefronts and streetcars. In 2011, Vasconcelos set up an incubator there called Startup Lisboa. Jorge and Caxaria founded Codacy in a room not much bigger than a broom closet. Now Startup Lisboa is home to more than 40 companies in what feels like a clubhouse, as its inhabitants tap away on laptops and talk shop.

Across town, entrepreneur António Lucena de Faria is standing in a classroom showing a guest from Brazil a diagram on the wall depicting a nine-step program for turning ideas into businesses. This is Fábrica de Startups, a four-year-old accelerator that runs boot camps for aspiring startup founders, including applicants from Brazil,
Macau, and other Portuguese-
speaking lands. This March, Fábrica will host “Tourism Ideation Week” to brainstorm new business models for one of the country’s only growing industries. The best ideas will earn their authors a place in the five-week Discoveries accelerator program this summer.

Even so, laying the building blocks of a startup community is actually the easy part. It’s a good sign that pioneers such as Jorge took a chance on starting a company in Portugal. But the key to scaling up, says Lucena de Faria, is making that option a mainstream feature of Portuguese business. That’s not going to be easy in a country with a professional class long conditioned to avoid risk and seek fortunes offshore. “We have to change the culture of the country,” he says. “That’s the challenge.”

The true test will come a couple of years from now, when Jorge’s generation of startups solicits so-called growth-stage funding. They’ll probably have to visit Silicon Valley or London or Singapore for that, because there aren’t many European private equity investors who play at that end of the spectrum. If these entrepreneurs return with the capital to create more products, more jobs, and greater wealth, they’ll be on their way to turning their gambles into something indelible. Edward Robinson, Bloomberg