* Growth-oriented concepts changing old ways
* Small businesses - economy’s backbone - fold too often
* Government hopes to build “startup nation”
* Portuguese market good testing ground before global launch
By Andrei Khalip
LISBON, Dec 21 (Reuters) - Few things encapsulate Portugal better than its bakeries, where people from all walks of life mingle over coffee and cake. So when a whole new chain emerges in the depths of an economic crisis, it sends a glimmer of hope.
“It’s almost like a hideout from the crisis. I was really happy to learn that they are opening more stores, it dispels the gloom a bit,” said Ana Justina, a freelance designer and a regular at two of the 12 cosy outlets of A Padaria Portuguesa (The Portuguese Bakery) in Lisbon.
With unemployment at record highs, empty stores and “for rent” signs on cafes are far more common than prospering new businesses after a 40 percent jump in insolvencies this year.
Still, the bakery chain is just one example of how a bold business concept can defy the worst economic slump since the 1970s, a smothering tax burden imposed under an international bailout, record-low business morale and a lack of bank loans.
Although not numerous, other startups in areas from farming to computer technologies and biomedicine, including in the all-important export sector, are jumping into action.
“There’s an urge to change and do business better,” said Daniela Couto, co-founder of Cell2B biomedical startup that raised about 1 million euros earlier this year, mostly from private investors in Portugal, Spain and the United States.
Cell2B is preparing for clinical trials of promising cell therapies aimed at eliminating transplant rejection in humans, after which the founders do not rule out a share offering.
Nuno Carvalho, 34-year-old CEO of The Portuguese Bakery, says a crisis is little hindrance to a growth-oriented concept.
“We are proof that by being lean and mean and responsibly managing your resources one can have a healthy business and expand, even under these circumstances,” he said.
“And the crisis presents its opportunities, like much cheaper leases and available skilled labour,” he said.
The stores with tiled floors are modern and clean yet distinctively Portuguese, while smiling staff are worlds away from the sour-faced vendors at many typical bakeries.
Set up with just one store in late 2010 by five members of the same family, it plans to invest 2 million euros ($2.6 million) from its cash flow next year into seven new outlets in greater Lisbon.
Carvalho says it is the first chain of street cafe-bakeries in Portugal and envisages expanding at home and possibly abroad. He says he has turned down franchise requests from as far as Australia in favour of maintaining control of the brand.
The debt crisis has hammered the economy, depriving it of easy bank loans and state funding, but it is also helping to drive change, forcing entrepreneurs to come up with clever, detailed business plans to be noticed by precious few investors, who typically pick just 1-5 deals from 100 proposals.
These ideas are slowly beginning to challenge the traditional way of doing business in Portugal that is often criticised as too near-sighted and lacking ambition.
“Too many companies that are being set up still think small and are not sustainable enough,” said Paulo Andrez, president of the European Trade Association of Business Angels and Seed Funds which invest in promising startups.
Local angels’ groups and venture capital investors say they have a total of 350 million euros to invest in startups.
“It’s better to create fewer but more sustainable firms that think big in terms of growth. In northern Europe the proximity of countries like Belgium, the Netherlands and France makes most entrepreneurs think global from day one,” Andrez said.
He cites a Portuguese case to show how it should be done; United Resins opened a factory in 2010 backed by angel investors to make resin derivatives used in printing inks and exported all of its output worth 25 million euros last year.
As tax hikes and spending cuts under the bailout austerity programme depress domestic demand, the country is betting on exports to ride out the crisis and return to growth in 2014. Exports have grown, but still remain below the EU average.
Small and medium-sized businesses account for almost three-quarters of jobs and 55 percent of company revenues, but their overall quality, and lifespan, leaves a lot to be desired.
The latest Eurostat data show Portugal had the third highest “birth rate” of company startups in Western Europe after France and Holland in 2009, before the sovereign debt crisis, more than a third higher than neighbouring Spain or Ireland. But the survival rate, at about half, was the lowest.
The 2011 Global Entrepreneurship Monitor showed entrepreneurial intentions still exceed those of most EU states, double the levels seen in fellow bailout receiver Ireland that boasts low company taxes. Perceived opportunities lag behind Ireland’s but exceed those in Greece and Spain.
Cell2B’s Couto says defter, young entrepreneurs are emerging. “When I returned in 2011 after a two-year stint in the United States, there were many more companies being set up, more bright business plans vying for financing at incubators.”
Startup incubators, often sponsored by municipalities and mainly aimed at tech companies needing little initial investment and promising good returns, have mushroomed in the capital and university centres across Portugal. They offer startups cheap office space and free tax and legal consultancy.
“We are not a startup hub like London and Berlin. But when investors visit from abroad, they always pick one to invest in. They are amazed by the technical quality, the programmers and engineers,” said Joao Vasconcelos, head of the Startup Lisboa incubator that homes 40 startups, resembling a busy beehive.
It is yet to create a breakthrough computer-based service like Sweden-founded Skype or a viral game like Finland’s Angry Birds, but Portugal is no stranger to world-class technological innovation.
The world’s first prepaid mobile phones were launched here, as were single, country-wide electronic motorway tolls.
“Portugal is a demanding, sophisticated market, an early adopter. So if we test a product here and it sells, it has a high probability of success globally,” said Francisco Banha, head of the FNABA national business angels federation.
Britain’s Seedcamp startup accelerator fund has invested in four tech companies under Vasconcelos’ tutelage - from golf performance analytics to simple online tax refund claims, naming them among “70 of Europe’s most promising startups”.
Some foreigners prefer to do it themselves.
Nick Coutts is co-founder of the Fitness Hut gym chain whose modest fees have lured thousands of clients. It is betting on a low-cost model, saving on frills like saunas, pools and reception staff, who are replaced with keypad entry.
“I think it’s a very easy story to sell - a low-cost gym is going to work in a recessive economy. There are people with money still prepared to back startups if they have the right concept that fits into what’s going on,” the Briton said.
The company opened the first gym in Lisbon in Oct. 2011, and now has four working clubs with 15,000 clients, including in Porto, with 2012 revenues at 3.2 million euros. It plans to reach 20 gyms in Portugal and expand to Brazil.
Is doing business in Portugal very painful? Not really.
“Bureaucracy here is challenging, especially in terms of licensing needed to get things moving at a reasonable speed, but when you get some momentum, it’s like most countries,” he said.
Portugal has simplified the process of setting up companies in recent years, but a lot more red tape is left. The government is aware it needs to cut it to return the country to growth.
“To cross this valley of death we need a great number of firms, especially innovative and export-oriented. The government is doing its best to put an end to bureaucracy, simplify the licensing to make Portugal a startup-friendly nation,” State Secretary for Entrepreneurship Carlos Oliveira told Reuters.
Whether this will be done remains to be seen, but Oliveira’s credentials in the startup world are solid - he was behind the mobile tech company Mobicomp set up in 2000 with a capital of 5,000 euros that later went international and was sold to Microsoft in 2008, reportedly for millions.
At the peak of the austerity drive he arranged social security breaks for firms hiring jobless university graduates, tax discounts for 2013 angel investment and set up a venture capital vehicle to invest 20 million euros a year in startups.
Another key area where Oliveira wants to promote change is higher education, with a greater focus on entrepreneurship studies and implementing business ideas.
“I graduated in management knowing how IBM and Kodak worked, but not how to set up and run a small business in Portugal, which is where most end up working,” said Filipe Botto, CEO and co-founder of another company coached by Startup Lisboa. The incubator already runs workshops for university students.
“We’d have been better off studying that, to have tools to overcome this crisis, to create our own jobs,” said Botto - an investment banker on an entrepreneurial sabbatical to launch his Yonest company. He plans to produce “honest” natural handmade Greek yogurt to occupy an unfilled market niche in Portugal.
“Some think Greece and Portugal in one sentence spell too much crisis,” he laughs. “To me it’s an anti-crisis recipe.” ($1 = 0.7628 euros) (Editing by Philippa Fletcher)