Switzerland is far from being a venture-capital hotspot. The various projects however are making a difference, according to an essay by Michael Bornhäusser for finews.first.
finews.first is a forum for renowned authors specialized on economic and financial topics. The texts are published in both German and English. The publishers of finews.com are responsible for the selection.
Switzerland at full throttle: if you read the local press this is the impression you will get at least. Digital Switzerland, Startup Accelerator, Swiss Venture Club are but a few of the institutions supporting new firms in their development, not with money of course, but with a network (investors), coaching (how do I get money?) and cool competitions (who takes the biggest prize?).
And then there’s the Crypto Valley of Zug, where the real Silicon Valley will hold a conference later this year. Fintechs and Switzerland – should be a perfect fit. After all, we also once were one of the most prestigious financial markets in the world, even if not due to its innovative prowess, but because of its discretion.
We also have big pharma and the growth market of biotech in Switzerland. Universities ETH Zurich and EPFL in Lausanne are churning out spinoffs in robotics, software, media and technology one after another. Should be a good basis for success, one would think, but is it true?
«More and more money is being invested in Swiss startups»
Sure, more and more money is being invested in Swiss startups. Last year, the figure was 938 million Swiss francs, the double of 2014, according to the Venture Capital Report. Unfortunately, one needs to read the small print. Because if you look where the assets have been invested, you will find out that 450 million francs of the total were given to six firms, with 200 million alone being invested in biotech firm ADC Therapeutics.
Biotech took 47 percent of the total investment volume, ICT including the booming fintech business received only 300 million francs. Big money at first sight, but small fry compared with the mature venture capital hotspots. In the U.S., $85 billion was invested in venture capital firms in 2017. The West Coast, with hotspots Silicon Valley and Lon Angeles, received more than 40 percent of the total.
«Specialization is being fostered if a lot of capital is available»
The financing system of the hotspots is a further factor. Specialization is being fostered if a lot of capital is available. A further important aspect is the phase in the development of the company at the time when the money becomes available – the seed stage, before a product appears on the market; early stage, at the time when a company takes its product to the market and later stage/growth, when the product already is on the market and the company about to expand.
In venture capital hotspots such as the U.S., Israel and the U.K., there are investors for each phase, in which they typically enter the frame. It is absolutely normal for portfolio firms to not only provide expansion capital from later stage/growth, but also to buy out the early stage investors to get larger stakes. It means that early-stage investors don’t have to stick with the firm right through the final exit, but can opt out earlier and put the capital to work again.
Three of the five exits that Sallfort completed within its venture capital club deal since 2012 came into being courtesy of late-stage funds, which invested the assets in the company and assumed the shares. This important factor for a venture-capital hotspot evidently requires a great deal of capital and a large number of specialized investors.
«There are factors which Switzerland as a venture-capital country is struggling with»
From such a situation we are far away in Switzerland, not to say light years. If you want to invest and take a stake early on, it can take years to have that money available again. The latest example is Polyphor, which went public a short while ago. A large number of venture capital investors have been tied up for more than ten years without an opportunity to realize at an earlier stage.
There are more factors still which Switzerland as a venture-capital country is struggling with. In Switzerland, valuations of early-stage investments are far too high as have shown all comparisons with other markets. The cost of taking a product to the market is higher than in the U.S. or the U.K. because startups very soon have to internationalize their business to reach an appropriate size, and that is more expensive than in a large domestic market. Anglo-Saxon startups furthermore are far more aggressive and happier to take risks than ours.
The chance to achieve a successful exit with a venture-capital investment is still the dominant factor for an investment decision. In six years, Sallfort completed five successful exits with a rate of return of several hundred percent. All of those were based in the U.S. or the U.K. The valuation of the firms at the time of sale was between $200 million and $6.5 billion.
Both the number as well as price of exits would have been nigh on impossible in Switzerland as venture-capital hotspot San Francisco has as many exits worth more than $100 million in a month as Switzerland in the past four years.
«Switzerland is quite far away from being a venture-capital hotspots»
Conclusion: Switzerland is quite far away from being a venture-capital hotspot. But specializing in biotech and fintech as well as a number of initiatives are slowly but surely making themselves felt. We watch the Swiss startup market with great attention and offer a hand with international contacts and at the same time still invest in the real hotspots.
If you have access to the relevant startups, the potential for success and predictability of the time frame remain significantly better than in Switzerland.
Michael Bornhäusser is partner and managing director at Sallfort Privatbank. He is responsible for private equity, products and services.
Previous contributions: Rudi Bogni, Peter Kurer, Oliver Berger, Rolf Banz, Dieter Ruloff, Samuel Gerber, Werner Vogt, Walter Wittmann, Alfred Mettler, Peter Hody, Robert Holzach, Craig Murray, David Zollinger, Arthur Bolliger, Beat Kappeler, Chris Rowe, Stefan Gerlach, Marc Lussy, Nuno Fernandes, Richard Egger, Maurice Pedergnana, Marco Bargel, Steve Hanke, Andreas Britt, Urs Schoettli, Ursula Finsterwald, Stefan Kreuzkamp, Oliver Bussmann, Michael Benz, Peter Hody, Albert Steck, Andreas Britt, Martin Dahinden, Thomas Fedier, Alfred Mettler, Brigitte Strebel, Peter Hody, Mirjam Staub-Bisang, Nicolas Roth, Thorsten Polleit, Kim Iskyan, Stephen Dover, Denise Kenyon-Rouvinez, Christian Dreyer, Kinan Khadam-Al-Jame, Robert Hemmi, Anton Affentranger, Yves Mirabaud, Katharina Bart, Frédéric Papp, Hans-Martin Kraus, Gerard Guerdat, Didier Saint-Georges, Mario Bassi, Stephen Thariyan, Dan Steinbock, Rino Borini, Bert Flossbach, Michael Hasenstab, Guido Schilling, Werner E. Rutsch, Dorte Bech Vizard, Adriano B. Lucatelli, Katharina Bart, Maya Bhandari, Jean Tirole, Hans Jakob Roth, Marco Martinelli, Beat Wittmann, Thomas Sutter, Tom King, Werner Peyer, Thomas Kupfer, Peter Kurer, Arturo Bris, Michel Longhini, Frederic Papp, Claudia Kraaz, James Syme, Peter Hody, Claude Baumann, Dennis Larsen, Bernd Kramer, Ralph Ebert, Marionna Wegenstein, Armin Jans, Nicolas Roth, Hans Ulrich Jost, Patrick Hunger, Fabrizio Quirighetti, Claire Shaw, Michael Welti, Peter Fanconi, Alex Wolf, Dan Steinbock, Patrick Scheurle, Claude Baumann, Sandro Occhilupo, Claudia Kraaz and Will Ballard.
