“The legal framework should not prevent virtual assets as a new form of investment”

Leaders League. What is the key factor driving start-up investors in Portugal?

Ordonhas & Bandeira:  Investors are driven by opportunities everywhere. The number and quality of investors are directly linked to the quality and maturity of a market and to the opportunities such a market generates.

Start-up ecosystems are systems (like many other living systems) where each agent plays a crucial role in the development of the other agents. Good education creates great entrepreneurs that drive fabulous ideas that attract knowledgeable capital. This then helps to develop excellent products that generate solid companies. These companies in turn make the necessary money to reinvest in new ideas, new entrepreneurs, new products, and so on and so forth.

There is not one single key factor driving start-up investments in Portugal, there are several. The first one is education. The country has good educational levels with a high literacy rate in English. Accordingly, Portugal stands well positioned now as a country where large companies search for talent or where large corporations deploy and grow development teams. This creates greater opportunities in the Portuguese market. Another key factor is adaptability. Portuguese adapt quite easily and are known to be risk takers. It is in many ways a country where business owners experiment, fail, and experiment again and again until they reach sustainability levels. The third factor is innovation. Several years ago, universities changed their mentality regarding IP and that has boosted innovation in the country. The combination of these factors is something to which investors are attracted as it is the basis for well-prepared entrepreneurs and teams. Additionally, foreign investors have confirmed this on several occasions.

There is not one single key factor driving start-up investments in Portugal, there are several

Do you believe that the Portuguese legal framework is helping the rise of business unicorns?

Unfortunately, the Portuguese legal framework does not help the creation of unicorns, however, that is not the main reason why several Portuguese start-ups choose to grow in other jurisdictions, for example.

Portuguese DNA start-ups that have become unicorns (currently seven – Farfetch, Feedzai, Outsystems, Talkdesk, Anchorage, Sword Health, and Remote) reached such status after successfully landing in other markets, namely the US.

Portugal, being a small country, is not an expansion market, but it is a good trial market. Therefore, it is perfect for developing ideas, evaluating them, pivoting accordingly, and relaunching the product. And when the product meets all the criteria to be successful, companies must attack different, larger, scalable markets to reach unicorn status.

Portugal is a good trial market [and] is perfect for developing ideas, evaluating them, pivoting accordingly, and relaunching

Building up in different markets accelerates growth projects which demand more money and funding rounds that the Portuguese market is, unfortunately, not yet ready to deliver. That is another factor that impels Portuguese DNA unicorns to grow in other markets. Portugal can deliver series seed and series A rounds, but it is still short in regard to delivering series B funding rounds.

For unicorn-type companies to grow and retain in small markets like Portugal, a conjugation of measures must be established, and they should tackle the difficulties of all the agents in the ecosystem, e.g., start-ups, investors (small and big), and market enablers (universities and incubators). Many of these measures include the adoption of investment tax-friendly policies that create aligned incentives for investment.

On the start-up side, the legislator should concentrate on how to retain talent in Portugal. This is crucial for the development of the ecosystem. Talent is retained by providing incentives for foreigners to come and for Portuguese to stay. Currently, foreigners can access favorable tax regimes that create such incentives, but we still need to work on the retention of Portuguese talent, namely creating mechanisms that allow for easy processes to employ but also to restructure, if needed, and alternative remuneration schemes that are tax-efficient, such as favorable stock options framework.

From the investors’ side, it is important that there are measures for smaller investors to deploy the seed capital. A quite simple one is to create tax deductions for investment in start-up companies up to a certain amount. This simple measure creates high liquidity for start-ups. For larger investors, the reinforcement of their financial capacity is essential. This is possible by using public matching funds, but more efficiently, by creating tax deductions for those investing in these funds.

Last but not least, there needs to be a constant investment in innovation. This should not come from the state but rather from society and therefore a policy of tax incentives is typically far more effective than the use of state budget money.

What trends are you seeing in investment and funding?

The words more commonly used by investors are diversification and de-risking.

There was a time (up until a couple of years ago) when funding rounds were commonly managed by a single investor. Nowadays, even small seed rounds gather the joint efforts of two or more investors and different types of investment structures. A combination of different types of investors (small and big in the same round) and the combination of dilutive and non-dilutive mechanisms, along with crowd-based funding, are common these days. Additionally, convertible instruments have become the norm thanks to easy access and debt-to-equity instruments are fairly standard now.

Given the risks of using virtual currencies for transactions, do you feel that a legal framework is necessary to minimize risks, or should the laws encourage these practices?

Virtual assets (which include more than just virtual currency) are becoming a trend in funding rounds. The question is not whether they will be accepted for transactions, but when they will be used as commodities in the funding space.

It is not an easy topic because, on the one hand, the risks are still too high, but, on the other, governments cannot stop and prevent these types of phenomena forever. If legislators expect to fully understand the phenomena prior to issuing any kind of ruling, then years will pass without having a reliable framework. We believe in practical approaches and that governments need to be clear in their messages passed to the public as well as in the defense of the stability and security of the financial markets. However, they cannot prohibit the world from spinning either.

Funding by the issues of tokens is already common in addition to the coexistence of hybrid equity. The legal framework should not prevent these new forms of investment. However, it must be very clear in terms of requirements from the issuers/start-ups through its messages conveyed to the market. For example, it is mandatory to stress that in each of these funding rounds tokens or virtual currency are not securities and are highly speculative, and do not bear any type of protection from the state or other organization. Further measures can include limiting the overall exposition of smaller investors to these types of issues through crowdfunding platforms as well as imposing heavy fines on any issuer not complying with its information obligations. Once the market properly establishes the nature of these instruments (in a few years from now), then we can move forward in regulating them with more knowledge and efficiency.