Juan de Antonio remembers tougher times. In 2011, when the entrepreneur launched his tech start-up in Madrid, Spain was dealing with spiralling unemployment in the aftermath of a deflated real estate bubble and the global financial crisis.

“It was a time when people had to look at other [career] options. We tried to make a virtue of necessity,” says the co-founder and CEO of Cabify, the Madrid-based ride-hailing ‘unicorn’, a private company now valued above $1bn. “A combination of need and opportunities generated the right field for start-ups to appear.”

While Madrid’s tech and venture capital (VC) ecosystem has been slower to develop than its European peers, it has gained recent momentum and was less severely affected by the global correction in the tech industry. Government initiatives, a strong base of engineers and support infrastructure have helped Spain’s capital city attract more start-up funding and entrepreneurs from abroad, most notably from Latin America. 

Compared with Europe as a whole, which recorded a 16.7% year-on-year decline in 2023 of early-stage start-up investment, the Spanish capital experienced an 18.5% increase to €391m, according to Dealroom data. Madrid-based VC funds also raised a record €1.2bn last year compared with a 32% reduction across Europe.

In funding terms, Madrid still lags behind major hubs like London, Paris and Berlin. Nonetheless, the Spanish capital was recognised by research consultancy Startup Genome as the world’s top emerging ecosystem in 2023, up from 13th place a year earlier. To achieve its future potential, entrepreneurs say Madrid now needs to reduce bureaucracy, attract more late-stage capital and manage its rising living costs, which are still relatively lower than in other major European capital cities.

Crisis catalyst

Madrid is the country’s administrative and financial capital with a high concentration of corporates. Paulo La Sorda, corporate partnerships manager at Plug and Play Tech Centre, an accelerator, says Madrid is an attractive base for start-ups seeking to collaborate with, and sell to, larger companies. 

Madrid’s modern start-up scene dates back to as early as 2000 with the founding of notable tech firms like real estate platform Idealista and recruitment platform Jobandtalent. But a major catalyst for Madrid’s now maturing start-up scene was Spain’s struggling economy after the 2008 financial crisis. 

Many former bankers and management consultants laid off turned to entrepreneurship, says Gonzalo Tradacete Gallart, CEO of Faraday Venture Partners, a Madrid-based early-stage VC firm founded in 2011. 

More than 1440 tech companies were born in Madrid between 2012 and 2017, according to Startup Radar madri+d, up from 530 in the previous six years and a level since unmatched between 2018 and 2023. Among them was Smartvel, a travel content tech company founded in 2012. The company’s CEO and founder, Iñigo Valenzuela, says Madrid’s ecosystem has “changed dramatically” in recent years with more government support, co-working spaces, tech events and investors.

Unlike the UK and US, the VC industry in Spain has been “very conservative”, leading Madrid’s talent and innovation to be “relatively untapped”, says Claudio Feijóo, the head of entrepreneurship at the Technical University of Madrid (UPM) and an independent councillor for Fond-ICO, a public fund set up in 2013 to invest in other VC funds. Madrid is home to more than 53,000 engineers, giving it the largest tech talent pool in Europe behind London and Paris, according to Sequoia Capital. 

Since 2019, the injection of public funds from the EU and Spain’s central government to directly co-invest with VC firms has helped to boost availability of early-stage funding, says Javier Ponce, who was general manager of Spain’s technology and innovation agency CDTI until early 2024. But entrepreneurs continue to call for more later-stage funding to support scale-ups in the city.

Latin America connections

Despite the dearth of funding, Madrid’s tech ecosystem has gained recognition due to its five ‘unicorns’, including Cabify and Jobandtalent, and several exits — when an entrepreneur sells their business in part or whole — such as the acquisitions of fintech Allfunds in 2017 and Idealista in 2020.

One recent initiative to boost the ecosystem was the national Startup Law, enacted at the beginning of 2023, which aims to encourage foreign talent, founders and investors to relocate to Spain through tax exemptions and other benefits. While the law has only been “modestly effective” in reducing red tape, such as the difficulties in setting up and closing a company in Spain, Mr Feijóo of UPM says it has sent a strong marketing signal to the world.

This is most notable in the large numbers of Latin American businesses and investors relocating to Madrid. More than 820,000 people born in Latin America were living in Madrid in 2022, close to 50% more than in 2015, according to the National Statistics Institute. Figures from fDi Markets dating back to 2003 show that Madrid has attracted more FDI from Latin America than any other European city, with about a quarter of projects in the tech industry. 

Several initiatives run by Madrid’s city council aim to build a bridge with Latin America, through soft landing programmes for start-ups at its urban innovation space La Nave and talent bridge initiative, which annually invites 10 young people from across Latin America to training programmes in Madrid’s innovation ecosystem.

Wealthy families from countries like Mexico, Argentina and Colombia have chosen Madrid as a place to live and invest, notably in the affluent Salamanca district, where house prices have skyrocketed. “All my friends in Miami right now are thinking about coming to Madrid,” says Alberto Benbunan, a serial entrepreneur who moved to Madrid two decades ago from Venezuela and is now the managing partner of G8 Ventures, a tech start-up consulting company.

But even with the influx of wealthy investors and entrepreneurs, Mr de Antonio of Cabify says the city’s tech ecosystem has room to grow. “Spain has come a long way in the past decade, and especially Madrid,” he says. “[But] if you look at ratios of overall investment in the economy, we are still far away from where we need to be”.

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This article first appeared in the August/September 2024 print edition of fDi Intelligence.