I wanted to go deep into Portual’s startup scene to get right down to the nitty gritty about what’s really going on and then share it with all of you. Thankfully Stephan Morais from Indico Capital was kind enough to answer the call and entertain my pursuit of learning all about the local startup scene.

Stephan has a long history in tech all the way back to London’s glory days of boom and subsequent bust of tech stocks in the early 2000’s. Having earned his chops working for Arthur Anderson, hands on experience in startups, and subsequent graduation from Harvard, he was ready to take on the world. With all that experience, success, and grit he opted to launch Indico Capital where he could invest and mentor local Portuguese startups navigating the quagmire that is venture capital funding.

Scott: What are the biggest mistakes startups make when seeking venture capital?

Stephan: The number one question entrepreneurs need to ask themselves is whether or not this is a VC fundable company that could be a global category winner. Is it scalable, does it address a huge market, is it appropriate for venture capital type of investing? There is a tendency now for everyone to think they have a startup that warrants venture capital funding when in reality it is just a good business idea. Venture capitalists should only fund businesses that can grow exponentially and dominate the world in their own vertical. When we first look at a company we ask “Is this company 10x better than other companies who are solving the same problem” and 97% of the companies fail in that question in the first 10 minutes of conversation.

Scott: At what stage do you first consider investing in a startup? Do they need to have a prototype or revenue to be considered or do you invest at the concept stage?

Stephan: We have one fund that does pre-seed and the other seed for up to series A mostly. For the earliest stage we like to select companies that already have a minimal viable product, some pilots, and hopefully a couple of customers. Something we can evaluate in terms of useability and feedback from the existing users. We tend not to invest in ideas or powerpoints because we know it’s all about execution of those ideas. It doesn’t mean we wouldn’t but there is enough deal flow that we can skip that very early stage because the ideas might translate to nothing. Ideally we need to see some capacity to execute in order to evaluate if the team and the product is suitable for funding.

Scott: VC funding in the States includes much larger funding rounds than in Europe and rounds are larger in the UK than they are in Portugal. Why do you think that is and how does that impact Portuguese startups ability to compete on a global scale?

Stephan: Great question. I think it’s because the market in the States is much more mature so you have more funds with more money. In Europe funds are smaller because the sector is still growing. This means we have less people and less institutions willing to invest in the VC asset class. When you have less money to deploy you deploy less money per company across stages.

Does it affect European companies? Yes, but not necessarily badly. The early stage market for venture capital is always a local market. There generally aren’t many foreign funds willing to invest the first million. You need local VC players to do that. After series A it becomes a European wide and eventually a global market. The local VC’s, like Indico Capital, fill that gap by funding pre-seed to series A rounds and preparing the companies for series B and further rounds with the larger funds.

On the flip side, some countries like the US have too much capital which means many VCs end up funding companies that shouldn’t be funded. This leads to excessive spending practices where companies like WeWork receive too much capital via illogically high valuations leading them to being capital inefficient and ultimately going bust through overspending. In Portugal we can’t compete with those huge funds, but Portuguese startups intrinsically become more efficient with the funding they receive, teaching them good business practices. This in turn leads to being more attractive and sustainable for funding rounds down the line with those same funds.

Scott: How do forward thinking government initiatives, such as startup visas, impact the startup ecosystem?

Stephan: The vast majority of startups we invest in are not startups that relocated to Lisbon. It’s not a question of laws or visas that will change the market. More effective is having really high quality technical education that turns out talented engineers in significant numbers to make a difference.

Generally the talent is grown locally so startup visas are not overly beneficial. International talent is great in terms of human resources and founders who bring expertise, but that’s not a big part of the ecosystem which is 98% composed of Portuguese founders.

The ecosystem is built by dozens, not thousands, of great companies and a handful of well capitalized funds. Those successful startups then go on to create hundreds and thousands of jobs which shape the entire local ecosystem.

Scott: With most startups operating in the cloud, which means they can incorporate anywhere, which jurisdiction would you recommend and why?

Stephan: In general we have always invested in Portuguese companies. It does happen that after a certain size, particularly when US investors come in, they only feel comfortable when companies are located in a US jurisdiction. It is very normal after a certain stage the headquarters officially and legally become American when the vast majority of the investors and the capital that goes in is American. This is something that could change if Europe had the capacity to continue supplying capital and talent to these companies, but we’re not there yet. Even when that happens the majority of the employees remain in Portugal as a Portuguese subsidiary.

Scott: What’s the best way for a startup to get noticed by Indico?

Stephan: When it’s a really early stage company, we direct the companies to our website where there is a platform to apply to the pre-seed program we do with Google.

If the companies are looking for later stage seed or series A rounds, then that format is probably not appropriate. For those they should send us an email with their pitch deck explaining why they are applying and what they need from us. We will reply with feedback and set up a time to discuss in detail if it makes sense to have an initial meeting.

Scott Kirk is a tech author and entrepreneur who immigrated to Portugal from Canada due to severe and imaginary allergic reactions to the cold. With over 30 years experience as a developer, producer, and startup CEO, he sometimes likes to pretend to know a thing or two about tech. scottkirktpn@gmail.com