Access to Capital: How is the Swiss Venture Capital Market Organized? Part One

In 2016, Swiss startups attracted a record volume of investment amounting to CHF 909 million. Experts confirm that venture capital in the country is growing and becoming increasingly accessible. This also opens prospects for Russian entrepreneurs planning to open or locate their business in Switzerland. The country’s infrastructure for seeking early-stage enterprise financing, including financing by international funds, is rapidly developing. In the first part of this article, you will find out more about the fundraising system used by startups, the most promising industries and cantons, and support programs for startups.

Access to Capital: How is the Swiss Venture Capital Market Organized? Part One
Venture capital in the country is growing and becoming increasingly accessible.

Nearly a billion Swiss francs is a sizeable figure, especially for a compact economy like Switzerland. In comparison, according to the Russian Venture Company, the total volume of venture deals closed in 2016 in Russia was USD 0.46 billion. Besides, the growth dynamics of the Swiss venture market is more than stable: its volume has tripled in the last five years and has grown by 35% compared to 2015. The startup launch phase (pre-seeding and seeding stages) is characterized by the largest investment volume. Therefore, the “average bill” for a contract is relatively small and amounts to CHF 2.5 million. However, the number of contracts is growing, more deals are closed, and more investors enter the market. These are all positive factors confirming that Switzerland is striving to occupy a strong position on the global venture capital map.

Who is a Swiss investor?

According to the Swiss Private Equity & Corporate Finance Association (SECA), in 2016, about 70% of venture investments in Swiss startups came from abroad. The local market infrastructure is designed to draw attention to startups and to ‘sell’ them to investment funds from other countries of Europe, the USA, and Asia. But the national venture players have stepped up their activity in recent years, too. This is pointed out by the authors of the Swiss Venture Capital Report 2017.

Startups in Switzerland can find financing thanks to a broad network of business angels whose number grows every year. Private investors see good profit making opportunities in the technological market since interest rates on European bank deposits are not so attractive as potential income from venture investments. The number of corporate investors is growing in the country as well. “In the last five to ten years, large corporations have been actively establishing the so-called venture arms - venture investment departments”, says Ivan Orlov, CEO of Scientific Visual, Lausanne. “As a rule, they invest in small players in the markets where the parent company operates. For example, the venture fund Swisscom Ventures (owned by Swisscom, a Swiss telecom operator) invests up to CHF 5 million in the ICT sector companies. Nestle, the watch Group Swatch, the pharmaceutical company Roche and others have similar structures.” By the way, Swisscom launched an international investment search platform Call for Innovation last year. It is intended for startups from any country operating in specific sectors of the telecom industry. It gives an opportunity to present an operating business project to investors from Swisscom and to get a chance to cooperate with the corporation or its partners.

Institutional players, for example, pension funds, are still very cautious about investing their capital in technologies. Nevertheless, there are some examples: the Retraites Populaires fund in the Canton of Vaud is quite active. “Some pension funds are joining investment clubs,” comments Ivan Orlov, “for example, the GoBeyond platform. Such venues allow several investors to invest jointly in deals cutting the stakes and risks of each participant.” The number of non-traditional venture investors, in particular, family offices, is also growing. They are created for managing family wealth. There are about 300–400 such family offices in Switzerland, and they usually operate on the instructions of foreign clients. They have been recently showing active interest in the venture capital market and investing. For instance, the neurotechnology startup MindMaze (it helps patients to recover from the consequences of strokes and paralysis with the use of virtual reality devices) attracted CHF 100 million with the assistance of family offices in 2016.

Which industries attract more investments?

“The healthcare and natural sciences sector remains the leader in the area of financing in Switzerland,” says Colin Tivendale, CEO of the Swiss recruitment company Swisslinx. “However, the focus within it is shifting from the purely pharmaceutical industry to intelligent technologies, including medical technologies and biotechnologies, neurotechnologies and information technologies in medicine. The ICT sector and all the related fields of knowledge, for example, the Industrial Internet and the Internet of Things, are also experiencing growth. Besides, investors are interested in robotics, drones and other hi-tech machines as well as green technologies. Fintech remains “the dark horse” of the venture market. I believe an explosive interest in this sector can be expected in the near future.” These data are supported by the analysis of the portal: in 2016, investment in life sciences amounted to 64% (CHF 577 million) of all investment in Switzerland, investment in the ICT sector amounted to another 30% (CHF 271 million).

Which cantons are characterized by the highest investment activity?

Oleg Sharonov, founder of Fly&Film and an independent investment advisor, says, “A good thing about the Swiss venture market is its versatility. Projects in absolutely different areas supported by strong teams of professionals can be found in various cantons.”

The absolute leader is the Canton of Vaud: according to the Swiss Venture Capital Report, in 2016, 46 rounds for the total amount of over CHF 460 million were closed here (51% of all investments). The Swiss Federal Institute of Technology in Lausanne (École Polytechnique Fédérale de Lausanne, EPFL), a rich breeding ground for startups, specializing, inter alia, in popular biotech and IT projects, is located in the canton. By the way, last year Lausanne was listed among the top 10 major European innovation hubs together with Berlin, London and Stockholm. The investment volume in Geneva has doubled and reached CHF 124 million within a year. In particular, offices of two companies ranked among the biggest European venture capital firms in 2016 according to Business Insider, Endeavour Vision and Index Ventures, with the total portfolios of nearly EUR 1 billion, are located in Geneva. In the canton of Zug, the investment volume has grown by 3.7 times from CHF 23 million to CHF 85 million compared to 2015. It should be mentioned, however, that the statistics was largely influenced by a major financial round closed by the biotechnological company Cardiorentis. By contrast, in Zurich, the national financial and business center, the investment activity is down by 40%. Lately, investments in this canton have been made in the sphere of biotechnologies. For example, companies that received investments include the developer of Ava, an ovulation tracking bracelet, and Topadur, a company that has developed treatments for diabetic foot ulcer. Investors are also interested in companies at the crossroads of finance and IT, especially considering that there are several fintech accelerators in Zurich (ImpactHub, F10 and others). Other locations on the map of Switzerland where venture investment activity is high are Basel, Bern and Neuchâtel. Funds in these cantons are mostly invested in spinoffs or startups of graduates from key higher education institutions.

Which support programs help startups to find investment?

There are three key programs supporting startups in Switzerland by helping them to find venture capital financing: CTI Startup Label, Swiss Startup Invest (formerly known as CTI Invest) and Venture Kick. CTI Startup Label is a coaching program of the Commission for Technology and Innovation (CTI). Every year, about 300 projects in such areas as biotechnologies, energy, life sciences, engineering, micro- and nanotechnologies, IT and communications as well as interdisciplinary high technologies participate in the program. The second platform, Swiss Startup Invest, is designed to bring together business teams and potential investors. It publishes project briefs and contact details of funds and business angels. The platform’s management holds major events for startups and venture investors in Switzerland such as the Swiss Venture Day and the Swiss Startup Day. Finally, the Venture Kick competition allows professionals to win pre-seed funding in the amount of CHF 3 million. In the ten years the competition has existed, its participants have attracted more than CHF 1.3 billion in total and have created nearly 4 thousand jobs.

Scientific Visual also participated in Venture Kick and competitions of W.A. de Vigier Foundation and the magazines Bilan and Alliance at early stages. “Participation in any competition of this kind helps to find investors, even if you are not the first prize winner,” says Ivan Orlov. “It is highly likely that your future investor or his wife is going to be in the jury or among the magazine’s readers. Networking plays a big role in Switzerland, so make an appearance whenever you can.”

Such competitions are a direct path to further financing. For winners, consolation prize holders and ordinary participants alike it has a multiplicative effect. Oleg Sharonov says, “A victory in prestigious innovations and startup competitions simplifies market entry for companies, allows to get support from authorization bodies or to start collaborating with large clients, partners and investors. For example, when we received the award of the bank of the canton of Valais in 2017, it gave us an unmatched advantage in dealing with consortiums of agricultural producers. Besides, it ensures coverage in mass media. When articles about the project with independent opinions of journalists start to appear, this is more valuable than a publication on a paid advertisement venue.”

Follow the link to read more about Swiss investors and their requirements to startups in the second issue of our overview of the Swiss venture market.

For additional information about various aspects of doing business in Switzerland, please refer to our Handbook for Investors or contact representatives of Swiss Business Hubs.

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