After a bumper year for Spanish startup investments in 2019, investors and founders are expecting funding to plunge this year, as the Covid-19 pandemic battered the country particularly hard, forcing the local economy to a virtual standstill and markets slumped.

“I know of deals that have been delayed, and some of them even fell through because of investors pulling out,” Eneko Knorr, a veteran investor and serial entrepreneur, said in an interview with CompassList. Knorr has backed some of the biggest successes in the Spanish startup scene, including unicorn Cabify and Ticketbis, which was sold to eBay in 2016 for $165m.

“The number of [deals] and the amounts invested are going to be down by a lot,” he replied by email. “We are in a crisis caused by something new and we can't forecast its depth. Investors are cautious.”

The IMF now expects Spanish GDP to shrink 8% in 2020 and unemployment to soar to 20.8%, in an economy heavily reliant on tourism, hospitality and leisure. Spain has an unemployment rate of about 13.8%, as of end-2019, the highest in the OECD after Greece.

With 172,541 confirmed cases of infection and 18,056 deaths as of April 14, Spain is currently the worst-hit country in the world in this pandemic, going by per million inhabitants. The country has been under lockdown since March 14.

On average, local economists are predicting Spanish GDP to contract between 4% and 6% in 2020, with the most pessimistic seeing a 10% drop from 2019, when the economy grew 1.9%. The recent global selloff in stocks has also caused a liquidity crunch among investors. Spain's benchmark Ibex 35 plummeted 22% year-on-year in March and 29% in the first quarter, the worst declines in history that wiped €160bn off the bourse.

Hard to grow or raise funds

VC investments rose to an all-time high of €737m last year from €505m in 2018, according to data by the Spanish Venture Capital & Private Equity Association, or ASCRI, made up by nearly 100 national and international VC and PE firms. A separate report by Spanish startup-focused media El Referente put last year’s funding figure at €1.1bn, slightly down from €1.23bn in 2018.Investments in Spanish startups in March 2020 fell to €10.7m, the worst monthly figure in four years. The financing went to 18 startups, with the three biggest deals each valued between €1m and €1.5m and coming from gaming, satellite telecommunications and regenerative medicine.

VCs are also finding it harder to raise money for their funds. Gonzalo Tradacete Gallart, Managing Partner and Chief Investment Officer of Faraday Venture Partners, said: “VCs are also struggling but that might be a short-term thing. Depending on their LP base, large VCs might be impacted, which results in less liquidity for their targeted startups.”

We are in a crisis caused by something new; we can't forecast its depth. Investors are cautious

Local startups surveyed by CompassList last week echo seeing a suspension in dealmaking.

“I do know a few [startups] that were in the midst of a funding round, and everything has been delayed,” said David Rovira, COO and co-founder of Polaroo. “We understand that investors will save their invested companies first, before investing in new ones… if the market is crashing.”

The personalized expense management and payment app just raised €1m in post-seed funding at the beginning of March 2020. “We saw movement and decided to expedite the round,” Rovira said. “Other startups haven’t been as lucky.”

Samuel Fuentes, CTO and co-founder of OnTruck, an on-demand B2B logistical solutions platform, said: “We assume that getting investments will get tougher.

“Startups usually need to grow by two to five times a year to get good [funding] rounds and this year, that will be very tough.” OnTruck last raised €25m in Series B funding in May 2018.

Valuations decline further

Besides having funding deals stalled or delayed, Spanish startups are also likely to find their valuations come under pressure.

Startup valuations and IPO expectations were already hurt by the WeWork debacle, Knorr said, and “now every [funding] stage will be affected even more.”

He added: “IPOs will be dead for the rest of the year, and big rounds will be rare.”

(See also: "From a record year to a tragic year" – Investor Eneko Knorr on Spain's 2020 startup funding)

Carina Szpilka, General Partner at Madrid-based K Fund, a prolific early-stage VC investor, agrees. “We’ve already started to see pre-IPO valuations deflating dramatically. Startups that are about to [go] IPO will have to rethink their financial scenario,” she said.

“I believe seed rounds won’t be affected as the risk is quite the same as before; whereas Series A and especially Series B and C will definitely suffer more in this crisis.”

Knorr said: “There are VCs that will keep investing, but probably they will change their investment hypothesis to look for profitability.”

Tradacete said Faraday Ventures Partners is favoring startups working in remote and digital experiences, and those that enhance productivity in these environments. But these companies must have earned at least three to four months of revenue and are in early funding stages. The Madrid-based VC is currently closing a deal to invest in a data security and recovery software startup targeting SMEs.

(See also: Faraday Venture Partners' MP Gonzalo Tradacete: "We are actively looking for startups")

How startups are coping

Anticipating more challenging funding conditions this year, OnTruck is cutting costs, changing its target customers and revisiting hiring plans, among other measures.

“We already know that we won't be hitting our ambitious targets for the end of the year, so we'll have to find ways of extending the runway beyond fundraising,” Fuentes said.

Foot Analytics, a smart retail analytics solution for malls and other public spaces, has seen its sales nearly halved.

“We're currently applying for government credit lines – just in case – as we currently have a strong cash position,” CTO and co-founder Akira Taniguchi Faixó said. The Barcelona-based company last closed a funding round in December 2019.

We'll have to find ways of extending the runway beyond fundraising

Some companies are taking the current lull in business to focus on improving their technology – an investment that could yield strong returns once the pandemic is over.

“Today we are investing time and resources on product development,” Jordi Romero, CEO of Factorial, an HR SaaS, said. “Our vision is long-term and therefore we haven’t drastically changed our roadmap.”

To startups, Knorr, as an investor, advised: “Have laser focus on profitability. We have to prepare for long months of a deep crisis, and perhaps we should postpone ambitious growing plans, and to go slower, burning less cash.”

Opportunities too

But for some startups in Spain, the Covid-19 outbreak has created new demand and markets, if unexpectedly.

“Covid-19 has brought us business that was not considered in our annual business forecast,” said Ivan Caballero, CEO and founder of Citibeats, a social trends monitoring and analytics platform for businesses and public entities.

“We have noticed more calls for papers from public institutions and global foundations, etc., all looking to collaborate in the research and development of policies to mitigate coronavirus’s effect and [our technology] is a key agent in this development,” he said.

“We cannot quantify yet the impact of the projects we are developing now, but it will be important as [the projects] are increasing day by day.”

The current home confinement necessitated by lockdowns across Europe “actually represents an opportunity” for Madrid-based StudentFinance, said Mariano Kostalec, the company’s CEO and co-founder. The fintech platform provides education financing based on an income-share model for those pursuing IT-digital courses, and matches the students with schools and employers.

More people are migrating to online learning, and many are likely to lose their jobs in the coming recession. They will need to upgrade their skills for a career switch to the IT sector, where talent is lacking, Kostalec said.

This will “accelerate the move to the education model of the future that we represent – online, intensive learning you don’t need to pay for beforehand, and job-focused courses for careers where there are still many vacancies,” he said.

The startup is lucky in that in December 2019, it secured €1.15m in seed funding, monies it has received. “We are well capitalized and have enough for well into next year,” Kostalec, who also co-founded student rental platform Uniplaces in Portugal, said.

For some others, the hope is to be able to resume operations in May, even if visibility remains poor for now.

“For us, time is crucial now, reestablishing our operations in May will allow us to meet fixed costs,” Marta Recasens, CEO of Vadebike, said. The company, which provides intelligent bike parking in Catalonia, has been inevitably affected by these days of lockdown. Besides filing for temporary redundancy, or ERTE, for its staff, the startup has also applied for aid from Enisa, the state support agency for SMEs, and is looking into an initial coin offering to raise funds.

“We are also postponing payment to our suppliers, and we are negotiating that, one by one,” Recasens said.

How one startup is coping

David Rovira, COO and co-founder of personalized expense management and payment platform Polaroo, shares the steps his company has taken to mitigate the impact of the current crisis:

- Plans for the next funding round have changed. [Note: Polaroo just raised €1m in March 2020] Instead of a life span of 10–12 months, now we have increased it to 16–18 months. So, the same money, but with different and more creative execution.

- The moment we saw “movement,” we decided to apply for EU funding for SMEs as part of our contingency plan, in case it takes longer to secure new investment. Given the outburst and escalation of the pandemic, we may have a better shot at getting an additional 100% equity-free grant to support our objectives.

- See this as an opportunity to offer an essential solution not just for consumers, but also for SMEs – restaurants, bars, shops. This means giving our service for free to all of them, so they can save money and reduce costs for all their bills. We will still get paid by [utility] providers and this will help us cover for the consumers.

- Close key partnerships to offer value-added propositions during these times of crisis. Solidarity is essential. At the same time, we can continue to focus on improving all the aspects of our value proposition, and give a better service once the pandemic is over.

What matters is to reduce unnecessary costs, be more creative with current costs, spread out expenditures, get things done with half the resources, and smile along the way.

It’s also important to take into account the type of service you offer as a startup, to know how much the Covid-19 crisis is affecting you. We are lucky enough to be 100% digital. This means that in less than 12 hours [since the work-from-home policy began], we were all working from our homes efficiently.

Gareth Gardiner-Jones contributed reporting for this article.

This article was last updated on April 15, 2020.