The New Spanish Startup Law and Its Implications for B2B Marketing.
In the fall of 2022, the Spanish central government introduced a parliamentary legislative initiative to bolster the startup ecosystem in Spain. The initiative’s primary goals are to promote tech-based and innovative companies and foster entrepreneurship in the country. Following extensive parliamentary and political debates, the law elaborated on three key areas:
- – New specific tax regulations for core elements such as stock options
- – Paperwork simplification
- – Tax benefits
The New Spanish Startup Law was approved by the Parliament later that fall, and it achieved its final assent on the 21st of December of the same year. It was then officially published in the official diary (BOE) on the 22nd of December 2022. Notably, this law marks a significant milestone as it is the first dedicated explicitly to startups within the European Union (EU).
However, the effective implementation of the law had been momentarily put on hold. A necessary milestone for startups to adhere to the law benefit is their certification as such. The responsibility for the Startup certification process lies with ENISA (Empresa Nacional de Innovación), a public agency that has historically managed innovation funding. The Startup certification process was only made public on July 21st, 2023, which posed challenges due to the lack of a precise definition of what constitutes a Startup during the first seven months of 2023.
As B2B marketers, closely monitoring the developments surrounding the New Spanish Startup Law is of utmost importance. The law could create promising opportunities for businesses operating within the startup ecosystem. By understanding the implications, we can tailor our marketing strategies to engage with innovative companies in Spain effectively. Therefore, I have conducted a detailed analysis of the law and its development.
The paramount idea around the startup definition
The paramount idea behind the startup definition, as established by ENISA and published in the official diary on the 21st of July, revolves around innovative entrepreneurship and is specifically related to technical innovation. The Spanish government has closely associated startup benefits (which we will discuss later) with tech startups, emphasising their crucial role in fostering innovation within the country.
Furthermore, the paramount concept of a startup also addresses the element of risk. A startup is defined by its goal of addressing a problem through the development of a new product, service, or process that represents a clear improvement. Naturally, this pursuit of improvement inherently carries an implicit risk of failure. We will see some implications of this later on.
In summary, the paramount idea behind the startup definition in Spain is innovative entrepreneurship, particularly in technical innovation.
These are the mandatory requirements that companies must meet to be eligible for startup certification under the New Spanish Startup Law. All the following requirements must be met.
- Age Limit: The company must be younger than five years old, except for specific sectors like biotech, energy, industry, or strategic sectors related to critical infrastructures, which can be up to 7 years old.
- No Previous Mergers or Acquisitions: The company should not have undergone a merger or been involved in a selling process. University spinoffs are accepted.
- No Dividends Distributed: The company must not have distributed dividends to its shareholders.
- Not Publicly Traded: The company cannot publicly trade on the stock exchange.
- Establishment in Spain: The company must be officially established and registered in Spain.
- Majority Workforce in Spain: At least 60% of the company’s workforce must be in Spain.
- Annual Revenue Limit: The company’s yearly revenue must be below 10 million EUR.
- Founders, Managers, and Significant Partners: Founders and managers of the company must not have any tax debts and must not have been sentenced for certain offences related to fraud and corruption. They should also be eligible to work with the Public Administration. This requirement also applies to partners who hold more than 5% of the company’s capital.
- Environment-Friendly Activity: The company’s activity must not cause harm to the environment, which is a requirement under the EU recovery plan.
- Innovative and Scalable Model: The company must demonstrate innovative entrepreneurship and a scalable business model.
The latter is the critical requirement and the one of utmost importance. Let’s dig into the ‘innovative model’ and its scalability.
What is an innovative model?
As defined in the New Spanish Startup Law context, an innovative model refers to a business approach that emphasises and actively engages in research and development (R&D) activities. The degree of innovation demonstrated by a company is a critical factor in determining its eligibility for startup certification. To meet the innovation requirements, a company must fulfil one or more of the following criteria:
- R&D Expenditure: The company should have allocated at least 15% of its total expenses to research and development two years before it applied for startup certification. In the case of companies younger than two years, this requirement applies to one year of R&D expenditure.
- (Or) Receipt of R&D Funding: The company must have received funding or credit for research and innovation projects within the past three years.
- (Or) Certification by the Ministry of Science & Innovation: The startup can be recognised as innovative if it has been certified by the Ministry of Science & Innovation or possesses the ‘Sello Pyme Innovadora’ (Innovative SME Certificate).
- (Or) Social security exemptions: The company may also qualify as innovative if it benefits from social security bonuses due to the employment of R&D staff.
- (Or) Young Innovative Company Certification by AENOR: The company can be deemed innovative if AENOR, a certification company, has issued a Young Innovative Company Certification (Certificación de Pequeña o Microempresa Innovadora) based on the EA0043 certification number. This certification requires a focus on innovation and R&D expenses of at least 15%.
- (Or) The issuance of the «Certificación de Pequeña o Microempresa Innovadora» (Certification of Small or Micro Innovative Company) by AENOR with the certification number EA0047. This certification confirms that the company meets the requirements to be considered an innovative small or micro-enterprise, as defined by AENOR’s standards.
- (Or) UNE 166.002 Certification by AENOR: Additionally, if AENOR has certified the company under the UNE 166.002 standard, which pertains to management systems optimisation, it can be recognised as innovative. This standard allows for a broader understanding of innovation beyond strict R&D expenditure.
According to the law, compliance with one of these criteria demonstrates a company’s commitment to innovation and research, making it eligible for startup certification. By meeting the innovation degree requirements, companies can access various benefits and support offered by the government to foster their growth and success as innovative startups in Spain.
What is a scalable model?
Evaluation of innovative and scalable entrepreneurship, defined by the following criteria:
Evaluation of market attractiveness, strategy, entry barriers, offer and demand.
Evaluation of prototypes, MVP (Minimum Viable Product), and service.
Evaluation of competition.
Evaluation of experience, training, and team background.
Provider & supplier dependence, rental contracts
Evaluation of relationships with other actors.
Evaluation of client volume/users.
The absence of a published scoring model raises concerns about potential discretionary decisions by ENISA. Open questions surround the evaluation process: who assesses startups? Is operating in a market with entry barriers required? Must demand to exceed supply?
Before Edison, there was no demand, competition, or clients for the light bulb. Disruptive innovations can create new markets without pre-existing demand.
The criteria appear to be influenced by startup investment processes, but they mainly focus on tax reductions/exemptions for Spanish-based startups.
As taxpayer funds aren’t invested, venture capital criteria seem misplaced, as they seek investment returns. Clarity and alignment are essential to ensure fair evaluation and foster genuine innovation support.
Some benefits already exist for those companies certified as innovative. These are the following:
- R&D Staff Cost Deduction: Certified innovative companies can deduct 42% of the R&D staff cost from their profit tax calculations. This deduction significantly reduces the tax burden, typically ranging from 15% to 30%.
- Social Security Cost Deduction: The certification allows for a deduction of 40% of the Social Security cost related to the R&D staff. This deduction provides further financial relief for innovative companies.
- Participation in Public Innovative Purchase Programmes: Certified innovative companies gain access to the Public Innovative Purchase Programmes (Compra Pública Innovadora), a special government initiative designed to support and promote innovation. This program offers opportunities for startups to collaborate with public entities and supply innovative solutions to meet their needs. Some regional administrations may have similar plans, providing additional avenues for startups to engage with public sector projects.
Now, the New Spanish Startup Law introduces additional benefits to further support and foster the growth of startups (when certified as such by ENISA):
- Foreign Investor Tax Benefits: Foreign investors can delay the profit and income tax payment, incentivising international investors to invest in Spanish startups.
- Paperwork Agility: The law aims to streamline startup administrative processes, reducing company registration time to five days. Additionally, notary taxes will be diminished, making it more cost-effective for startups to handle legal documentation. Bankruptcy requirements have become more flexible, easing the burden on startups facing financial challenges. Furthermore, there will be a single point of contact for Visa applications, simplifying the immigration process for foreign entrepreneurs.
- Innovation Policies: The government will foster testing environments to encourage startups to innovate and experiment with their products and services. Public innovative purchase programs will enable startups to collaborate with the public sector and provide innovative solutions. Public-private collaborations will be encouraged to facilitate knowledge transfer and joint projects. Public funding opportunities will support startups’ research and development efforts. The Spanish startup ecosystem will be actively promoted to attract investment and talent from both within the country and abroad. Moreover, student startups with a limited life of three years will be recognised, offering support and recognition to entrepreneurial students.
It’s important to note that while these policies have been included in the law, their actual development and implementation are pending. The success of the New Spanish Startup Law will depend on the effective execution and realisation of these benefits to create a supportive and thriving environment for startups in Spain.
While introducing some benefits for startups, the New Spanish Startup Law faces certain limitations and challenges that warrant further consideration and development.
A fiscal dumping approach
The law is hugely focused on tax reductions for Startups. This means fiscal dumping within the EU to make Spain an attractive destination for startup entrepreneurs seeking a base. Furthermore, the lawmaker’s view seems to have been something like the demand is there; let’s capture it. This approach does not create the right environment for startups. Instead, it will shift the market from one State to another within the EU.
Lack of vision
One other significant observation is the country and publicity-centric approach of the law. While presenting Spain as the first country to publish a dedicated startup law may have communication appeal, creating a comprehensive and supportive ecosystem for startups that goes beyond tax benefits and communication strategies is essential. And that’s the critical question. What is the lawmaker and government strategic vision around the startup ecosystem? What is the vision?
Startups are primarily concerned about their business operations and growth potential, and the law should align more closely with their needs and aspirations.
The orientation to communication than the actual execution and the lack of detail attention when developing programmes law reminds me, unfortunately, about one the greatest fiascos ever produced with European funds: the Kit Digital programme.
The conflation of technology with innovation
An interesting aspect to note is the conflation of innovation with technology. The law defines startups as tech startups, which may exclude innovative companies from other sectors that could benefit from support. The emphasis on technology-driven innovation might limit the scope for startups in other domains, such as consumer goods or services, which can also bring significant innovation to the market.
Scalability at stake
Moreover, the revenue cap of 10 million EUR poses a scalability challenge. Many tech startups achieve scalability beyond this threshold, and the law could benefit only a limited number of startups within this cap. Scalability often comes after reaching a certain revenue level, and limiting benefits before this stage may deter the growth ambitions of startups.
Here’s some data. According to Crunchbase, there are 2,477 startups founded in Spain from 1st January 2018. Only 7 are Series B or beyond. This law will hardly make a difference.
The wrong certification approach
The primary approach of providing tax forgiveness and benefits might not fully meet the needs of startups. While an adapted tax regulation for startups is necessary, startups require more than tax relief. They need a supportive framework, the right environment, public administration flexibility, and possibly a dedicated startup agency that can guide, accompany, and nurture their growth journey.
Lastly, the number of potential beneficiaries from the law is limited. Considering that Spain had around 14,000 innovative companies in 2020, the likely yearly universe of startups eligible for benefits is estimated to be about 800 companies, without considering the stringent requirements outlined in the law. Such limitations will reduce the law’s overall impact on the startup ecosystem unless the law develops further funding and strategic initiatives.
|Innovative companies||14.000 (0.4%)||800 (extrapolation of 0.4%x2)|
Further development is necessary.
In conclusion, further development and implementation are necessary to maximise the benefits and impact of the New Spanish Startup Law. Addressing the identified limitations and challenges will be essential to create a conducive and nurturing ecosystem for startups in Spain. A more comprehensive and tailored approach, which extends beyond tax incentives, will contribute to fostering a dynamic and thriving startup landscape in the country.
The narrow scope of the startup definition, coupled with limited reach, suggests that this law may have minimal impact on the market, making it challenging to formulate effective strategies based on its provisions.
I will monitor forthcoming public programs for potential opportunities.
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