Expertise

Venture Capital: Startups must choose their investors wisely

At the 2018 Venture Capital Academy in Zurich, presented by UC Berkeley and S-GE, participants learned how to define, negotiate and execute early-stage investments, met with representatives from the Swiss venture capital ecosystem and received latest insights on the future of venture finance.

Sather Tower, also known as the Campanile, on the University of California, Berkeley campus, overlooking San Francisco Bay area
Sather Tower, also known as the Campanile, on the University of California, Berkeley campus, overlooking San Francisco Bay area

In late August 2018, 30 Swiss participants from the Swiss start-ups, corporate and investment side met with Adam Sterling, Executive Director of the Berkeley Center for Law and Business, University of California, Berkeley and additional high-profile speakers for the three-day Venture Capital Academy, one of UC Berkeley’s most popular executive education programs.

Startups and VC: In the US, it’s why not!

While Switzerland offers a successful seed funding ecosystem with an active local angel community and a vast network of support, there are significant differences for startups looking to grow using venture capital as a financing instrument. “One of the main differences is the risk appetite towards VC”, Adam Sterling says. “Swiss investors are more risk-averse, while investors in the US – and in Silicon Valley in particular – tend to say why not!”. Sometimes this means Swiss startups need to cross borders to grow – as did Kevin Sartori, Co-Founder of Auterion, the largest provider of open source software for drones, which leverages an ecosystem of over 5’000 developers and 400 contributors worldwide. Auterion just raised one of the largest seed rounds in Europe to continue the development of its software platform and to go-to-market in Europe, the US, and China.

Four stages of development: the entrepreneurial venture

A startup will need different skills at each stage of their venture development – and this cannot be incorporated in one single person. It is therefore key that startups can present a strong management team to potential investors. “You need to get the wrong people off the bus, and the right people on” and adapt the team according to the development stage of the company, stressed George Rehm, a founding partner of aeris CAPITAL AG, who accompanied numerous investments in Life Sciences between US, European and Swiss companies. Once a startup has gone through the phases of pure entrepreneurship and creation, strategic focus, systems building and corporate management are mandatory to put in place with the appropriate management team. Then, it needs to build its staged financing.

The different phases of VC financing for startups

During the workshops, participants looked at the different phases of VC financing – from seed to series A, series B, series “n” up to a predictable sale or IPO. After raising initial seed money from the 3F (Friends, Family and Fools), incorporating the startup around an innovative product and project, entrepreneurs can seek for more funding in order to grow their teams and accelerate the development of the product and its commercialization. Alternatively to the 3F, venture capital can also be used in the seed stage to allow entrepreneurs to perform market research and build a business plan, launch a prototype and build a management team. Usually, VCs enter the financing process after the seed funding to support product development, marketing, manufacturing, and sales.

When a startup is looking for VC funding, its pre-money valuation (before VC investment) is a crucial component of the deal. There are no strict rules about startup valuations and it is more an art than a science. Pre-money valuation takes into account factors such as product, sector, IP, revenue, valuation of competitors, competition with other funding sources, and more.

 

Video: participant Alexandru Butu on his learnings of cap tables and legal aspects of negotiations

Venture Capital: Think twice before getting married

Entrepreneurs should keep in mind that a VC investing in their project is not just about money and getting access to expertise. It means giving up a certain amount of control and influence and having to compromise – like a marriage. Eventually, every VC investor will demand an exit. For the company, this means either going public or selling to a larger company.

The typical financing lifecycle in Silicon Valley begins with the incorporation of a startup, at which the founders invest funds in exchange for common shares. The second step is usually an angel or seed investment in exchange for convertible securities. Then VCs invest money during a series A in exchange for series A preferred stocks, and at the same time the angel or seed investor converts their convertible securities into series A preferred stock (with a discount), with this process being repeated during B, C and further rounds.

In case of an exit – a liquidation event like an acquisition – it is crucial to scrutinize the terms and conditions, as a slight change in a “and” or “or” can dramatically change the outcome for the founders and favor the investors. In the Silicon Valley, a common model of liquidation preference is a “1X non-participating liquidation”. Other aspects to scrutinize in the Term Sheet are the option pool, the vesting timeline and the anti-dilution protection. 

“Investors want to see how teams solve problems”

During the local venture expert panel, Michael Sidler, board member SECA and co-founder and partner of Redalpine Venture Partners, pointed out the factors influencing an investment decision from a venture fund’s perspective: “People are key. We want to see how a team solves problems, and this involves co-location – having the partners in the same location.” While it’s a sign of entrepreneurial talent if a startup has their communication team in Berlin, their software engineers in Serbia and their CEO in Zurich, the core team should be in one place, Sidler stresses. He highlighted the importance of a global entrepreneurial thinking beyond Swiss borders and urged Swiss entrepreneurs to think global from the beginning.

This is where S-GE can help – with specific market information, consultation services, a worldwide presence via its Swiss Business Hubs, and a vast network of partners.

Work for your equity

Looking into vesting, participants learned that investors want to see founders work for their equity even if they don’t yet get a pay check. This means founders don’t receive any shares until they’ve been with the company for as specific amount of time, with four years being the industry standard, during which they receive their equity pro-rata, with one-year cliff or hold off. Vesting is a way to engage entrepreneurs and investors and align their effort and interests, and to strengthen commitment.

“Understanding the pros and cons of VC helps you choose the right type of financing”

Signe Fleischmann, co-founder of animato, a visual messaging app whose technology was developed at ETH Zurich, says understanding the mechanisms of venture capital and being able to negotiate term sheets takes away reservations of looking into this form of financing as a startup. “I learned that it is important to understand the dynamics of your financing rounds up until the next VC round. It’s not enough to just think about your series A funding”, he stresses. And: “Don’t take venture capital just for the money’s sake. The investors should be a cultural fit to your startup. And it is your duty to do due diligence on them as well!” Fleischmann concludes. animato will look into different options for financing, primarily into angel capital, to take the app to the next level.

 

Text by Sibylle Zumstein, Lead Content Marketing S-GE, MSc, and Dr. med. Amine Korchi, neuroradiologist, entrepreneur and CEO of Singularity Consulting GmbH

Video: startup analyst and coaching manager presso AGIRE foundation Barbara Vannin talks about her key takeaways from the program.

Additional information

Interview with Adam Sterling and Michel Kertai, Founder of EMBARK.LAW, on the venture capital situation in Switzerland

Interview with Adam Sterling in startupticker: "It is critical to understand the nuances of Silicon Valley inspired venture financing"

Are you a Swiss startup looking to expand internationally? Check out our tips, information and contacts for SMEs and startups here. Do you need more information on the US as your target market? Click here for contacts, links and market information.

Are you a US investor looking to invest in Swiss startups or are you interested in Switzerland as a business location? Click here to learn about the unique advantages, success stories and key industries in Switzerland.

Learn more about Venture Capital and participate in the Academy yourself!

Small and medium-sized enterprises form the backbone of the Swiss economy. One of their key success factors was and is their ability to innovate and adapt – something that startups, often at the very forefront of innovation, do on a daily basis. A crucial source of funding for young companies is Venture Capital. Also in Switzerland, Corporate Venture Capital becomes increasingly important with corporates seeking to gain access to innovative solutions from startups by investing in promising young companies. To learn more about the topic and its opportunities, join the Venture Capital Academy Switzerland 2019.

Recommend us
How should we contact you?

Premium Partner

Strategic partners

Institutional partner

Official program