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

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 second part of our article you will read about the mentality of Swiss investors and their requirements to startups. Follow the link to read the first part.

Access to Capital: How is the Swiss Venture Capital Market Organized? Part Two
The country’s infrastructure for seeking early-stage enterprise financing, including financing by international funds, is rapidly developing.

What is the mechanism of interaction with a Swiss investor?

First of all, a company looking for investments must meet certain requirements, otherwise it will simply not pass the due diligence process. The business must be registered in Switzerland (if the company is based in Russia it must have a representative office or a branch in Switzerland). Higher transparency of a company’s business, richer experience and higher qualification of the team lower investors’ risks, increasing their willingness to invest. Moreover, it will be necessary to present a finished investment project with a description of the idea, implementation timelines and phases, the market context, the competitive environment, the technology to be used, the relation of proprietary funds (or borrowings) to the investors’ money, and other parameters. It will be necessary to clearly describe the investment objectives and to estimate the forecasted efficiency and return on investments. This work is quite extensive. If you are only planning to establish a company in Switzerland, Swiss Business Hub Russia will provide consultations. It should be noted that the Center does not search for project investments, but it is ready to provide information on opening a company in Switzerland. Services are rendered free of charge.

Ivan Orlov, CEO of Scientific Visual, told us about the stages involving interactions with Swiss investors. In 2016, his startup attracted investments (the amount is not disclosed) via GoBeyond, a crowd-investing platform. A part of the investments will be spent on the company expansion and entry in Asia and the USA, and the other part will be used to create equipment for the new markets.

“In different rounds we worked with three Swiss investor groups: Business Angels Switzerland, GoBeyond and StartAngels,” says Ivan. “GoBeyond invests in companies from all countries. The other two groups invest primarily in Swiss companies. Apart from administrative details, the mechanism of getting their investments is the same:

  1. You send a brief project description (executive summary) and receive an invitation to make a presentation for the group.
  2. After the presentation, investors vote to decide if they are interested in this project. If the distribution of votes is in your favor, a fiduciary is appointed to perform the due diligence process.
  3. The elected representative works with you to clarify the technological details, to get acquainted with employees and to prepare the term sheet. Most probably, the fiduciary will spend several days in the company, meet buyers — with your permission — and try to learn as much as possible about you personally. The thing is that Swiss investors attribute high importance to the leader’s personality and try to get a feeling about him or her.
  4. Upon completion of the procedure, the fiduciary announces the results at the group meeting where each investor decides how much he or she is ready to invest in your project. The fiduciary signs the term sheet, collects the money and transfers it to the company account.
  5. Typically, a round lasts 3 to 9 months, and, upon its completion, the fiduciary may claim his or her seat on the board of directors. The fiduciary may take a director seat or an observer seat. Communication with investors goes through the fiduciary. In due time, he or she may help to find money for the next round.

Things you should know about a Swiss investor’s mentality

Vitaly Ponomarev, CEO at WayRay, thinks that a startup “with Russian roots” has quite a good chance to find foreign investments (in Europe, the USA and even Asia), provided that he or she already has a stable business in Switzerland. Registration in Switzerland improves the perception of the company by investors and has a favorable effect on the negotiation outcome. If the contract is governed by Swiss law, the venture’s potential risks are minimized.

According to Ivan Orlov who received numerous offers both from Swiss and from Russian investors during his career, bureaucratic hurdles associated with obtaining venture funding in Switzerland are much easier and faster to overcome than in Russia and other European countries. Most issues can be solved in a discussion over the phone, and, if a document is required in writing, it is always clear why it is necessary. Besides, the level of confidence in entrepreneurs is higher.

“Russian business is characterized by the authoritarian style of governance, while the basis of Switzerland is equitable interaction and collegial decisions,” Orlov says. “Swiss people have it in their blood. However, the same qualities often impede prompt decision making, slowing down venture development in the country.” At the level of business angels, certain inertia is compensated by the fact that for many of them investments are an obligation towards the society of a kind rather than a profit-making machine. Facilitating development of socially responsible business, they fulfil a higher mission, creating work places and improving the well-being of the society. “Having this in mind, establishing the first contacts be sure to mention that your project will improve the prosperity of Switzerland,” recommends Ivan Orlov.

According to Oleg Sharonov, founder of Fly&Film and an independent investment advisor, most of the Swiss projects are long-term, with breakeven or payback points achievable in 3–5 years. This concerns both IT and high tech developments, with potentially longer terms in the pharmaceutical sector and biotechnologies. In Russia, venture financing volumes are by times lower than in Europe or the USA, especially at the initial stages. “Projects in Russia are often short of money for development during the initial stages. In Europe support is more sizeable, and in the USA it is much easier for projects to get financing and it takes less time,” says Oleg.

According to him, the local mentality has a significant influence on how venture investments in Switzerland work. Swiss people tend to be thorough and to take more weighted investment decisions. Investors in the USA act in a slightly different manner: they look at hundreds of projects and invest in dozens. As a result, one or two projects will be successful and cover the losses from the failed ones. The number of projects in Switzerland is less in general, so investors are considering each of them more carefully, taking a long time to estimate and weigh risks. At initial stages, a project needs the so-called seed funding which can be provided by private investors ad various canton programs for support of startups at early development stages. Then the time comes for larger players – venture funds – which need proof of concept. “For example, we acted as investment advisers for a pharmaceutical project in the canton of Valais involving development of a medicinal product for treatment of uveitis, an eye disorder, a chronic immune inflammation, and decided to involve non-specialized private investors who trusted the team and the idea. Venture investments are the next stage which will begin after the project researchers have proven the efficacy of the chemical formulas developed by them,” says Oleg Sharonov.

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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