Gateway to Europe: Starting small in Spain

Dave Gray doubled the size and revenues of his European office in its first year.

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MADRID (FORTUNE Small Business) -- Marc Michel, director of digital marketing firm Greater Than One, based in New York, needed a local office to run European ad campaigns for U.S. medical firms. So he spent July 2007 scouting London, Hamburg, Zurich, and other cities. But Michel, 33, soon settled on Madrid.

Why? Because of a meeting with the last source he expected to be helpful: a local government agency.

"I rattled off a list of legal issues, office space, how to find the right people," Michel says. "The next thing I knew, they'd prepared a 100-page customized kit with answers to everything, all in English" - plus a list of local headhunters.

The Spanish capital has a long history of nurturing small business: 99% of companies in the Madrid region have fewer than 50 employees (in the U.S. as a whole it's about 94% of companies). Now, amid a small-business boom in the area, two government-funded groups - Promo-Madrid and Madrid Emprende - are hunting for foreign investment and winning high marks from U.S. companies.

Take a taxi into Madrid from the airport, past rows of 1970s apartment buildings, and it's easy to dismiss the city as the poor relation of Barcelona or Bilbao. But once in the old center, with its lively nightlife, you can understand why Madrid has emerged as a European hot spot.

"It has a low cost of living and a high quality of life," says Aric Wood, 37, CEO of design consulting firm Xplane, based in Portland, Ore. "You can attract people from all over Europe. Everybody wants to move to Madrid."

Xplane, which has 57 U.S. employees, opened a Madrid office in January 2007. Wood accelerated the process by acquiring a smaller Spanish design firm.

That turned out to be a smart move for Xplane, whose revenues increased 70% last year, to $5.4 million. Much of the growth came from European clients, Wood says. Xplane doubled the size of its Madrid staff from six to 12 in the first year.

Xplane's graphic communications campaigns require a lot of face time. Few of its European clients, which include BP (BP) and InterContinental Hotels (IHG), are based in Spain. But Madrid "makes a fabulous jumping-off point for all of Europe, the Middle East, and North Africa," says Wood - not to mention the Spanish-speaking world of Latin America.

As in most European countries, setting up shop in Spain isn't designed to be simple. The paperwork can be a nightmare, says Xplane founder Dave Gray, 44: "It's been a steep learning curve."

But Madrid appears to be embracing free enterprise. The regional economy grew 4% last year, more than double the rate in the rest of Europe, and growth is projected to be just as strong this year. Madrid's GDP per capita of 27,000 euros is 30% higher than the overall European Union average.

The Madrid city and region created PromoMadrid in 2004 and Madrid Emprende in 2005. Funded with an ample budget of 25 million euros, they assist foreign entrepreneurs with everything from work permits to corporate taxes to commercial real estate.

"We are a one-stop shop," says Vittorio Ortiz, director of investment at PromoMadrid.

PromoMadrid helped OpciónDos Energía Natural, a Spanish solar energy company co-founded in 2005 by American Greg Lukens, land a contract with Spain's largest mall. The key: PromoMadrid provided introductions to key energy policy officials in the provincial government.

"In Spain it's still a relationship market," says Joseph Geman, 35, a San Francisco-based consultant who opened a Madrid office in early 2007. "I've seen a lot of foreign companies underestimate that. You need a door opener to have sustained success."