Financing of startups in times of COVID-19: what public aid are they eligible for in Portugal?

Portugal - 10 / 15 / 2020

Tomás Pessanha and Rute Silva Gomes, Garrigues Portugal

In the current situation, obtaining finance can be key for many startups, both to cover cash needs and to be able to implement new growth projects. Therefore, it is essential to identify the public or private aid which is available to entrepreneurs. In this case, we analyze the public aid that can be found in Portugal.

The international pandemic situation in which we are placed, caused by the outbreak of COVID-19, has had, and will foreseeably continue to have, a very significant adverse impact on the economy and on the national business network, the duration of which is still uncertain.

Portuguese startups have not been immune to the exceptional situation in which we are living, many of them experiencing drops in sales and planned projects, which, in some cases, have already caused their permanent closure.

However, the current pandemic also presents opportunities. Indeed, the digital transformation which was already seen in some sectors has been speeded up and has become widespread, which has led to an increase in the turnover of some startups and to the emergence of short-term growth opportunities (which must be taken advantage of still, for the foreseeable future, in the context of the pandemic experienced).

Thus, although for different reasons, many startups share the need to obtain capital immediately, so as to ensure, first of all, cash needs and, secondly, the necessary capital for the implementation of their growth projects.

In this context, it seems essential to identify and distinguish between two types of aid of which startups can avail: public and private aid.

To be noted in the private area is the aid derived from venture capital, characterized by investment rounds supported by investment funds, and the investment made by business angels, both already known to many Portuguese startups and quintessential promoters of the ecosystem.

Public aid is varied, since startups can resort not only to the aid granted by the State to Portuguese businesses in general (or to businesses as a whole of the specific sectors in which they operate), but can also resort to aid aimed only at startups.

We will focus our analysis on the latter, as well as on aid which is both public and private.

As has been widely publicized, the Portuguese Government presented in April of this year several measures aimed at helping the startup ecosystem and at mitigating the consequences of the pandemic for startups, including the following:

The launch of the financial aid ‘StartupRH Covid19’ (incentive equivalent to a minimum salary per collaborator, up to a maximum of 10 collaborators per startup);
The extension of the ‘Startup Voucher’ (a benefit of 2,075 euros per job of an entrepreneur);
The launch of the ‘Vale Incubação – COVID19’ (aid through the contracting of incubation services based on a nonrefundable incentive of 1,500 euros);
The launch of the ‘Mezzanine’ funding for Startups (announced as aid which consists of the making by investors of contributions convertible into share capital 12 months after they are paid); and
The launch of a call of Portugal Ventures for investment in startups (with tickets from 50,000 euros upwards).

To these are added two already in force, Fondo 200M and the Co-investment Fund for social innovation, both adapted to the current situation and involving co-investment in startups by the State and by private investors.

However, it should be pointed out that the grant of any of this public aid depends on the observance of various requirements. Indeed, some of them can only be granted to startups founded less than five years ago (the case of ‘StartupRH Covid19’ and ‘Vale Incubação – COVID19’). Others require that the startup has not yet received an investment from other venture capital operators (the case of the ‘Mezzanine’ funding for Startups).

It must be added that such aid can only be requested in specific periods, which requires following the different forums in which public information is provided regarding the periods for receiving applications for aid (for example, the case of the ‘Mezzanine’ funding for Startups, whose period for receiving applications has already ended).

It can be concluded, therefore, that one cannot resort to existing aid –sources of capitalization–, whether public or private, without a prior analysis of the needs of the business and the appropriateness of each of the existing alternatives for such needs, which must be necessarily carried out in advance on a case-by-case basis to enable businesses to comply with the relevant time limits for applications.

In particular, businesses must not only consider the short-time need which they seek to satisfy, but also weigh up the short and medium-term effects of the aid which they select (weighing up, for example, how each of the types of aid potentially suitable for their needs will affect the company’s assets and liabilities, the structure of its share capital and its ability to act in the future).

Therefore, it is advisable for startups to prepare a short list of the aid which they consider appropriate, by drawing up a list of the positive and negative aspects of each of them, the respective requirements and periods (to elapse or anticipated).

When the most appropriate collection of aid has been selected, startups must, at a first stage, verify, among the requirements identified on the above-mentioned short list, those which the company already meets, as well as the periods and costs associated with complying with the others and, at a second stage, implement all necessary actions for the effective and appropriate observance of the latter.