The article was first published on Investiere.ch and reposted on InnMind with author's permission
Author: David Sidler
David is investiere’s Head of Communications. He is in charge of all external and internal communications, marketing as well as media and policy issues. He holds a BA in Middle Eastern Studies and History from the University of Bern and an MA in International Affairs from the Graduate Institute of International and Development Studies in Geneva (IHEID).
Switzerland has yet to produce an internet giant like Facebook or Google and chances are there won’t be one any time soon. This doesn’t mean there aren’t any successful Swiss startups. On the contrary, dozens of Swiss companies have been acquired by industry leaders such as Apple, Intel, Microsoft, SAP, Pfizer and Monsanto (have a look at this comprehensive list of Swiss Exits). While investing in a billion dollar Swiss startup is highly unlikely, investors nonetheless have the chance to make a handsome return on investment if they pay special attention to the strengths and specificities of the Swiss ecosystem.
So what do investors need to consider when building a portfolio of Swiss startup investments?
Focus on high tech risk and low market risk
Successful entrepreneur and investor Dave Brown (invested in Lemoptix which was sold to Intel) has stated that he likes “high tech risk and low market risk” startups. We agree with this opinion wholeheartedly because such companies play on Swiss strengths while minimizing some of the main challenges facing startups in Switzerland.
A company with a high tech risk and low market risk is working on a very advanced digital or tangible technology that would be highly sought after should it work (that’s why the low market risk). So the big “if” here is whether the company can get the technology to work as it expects. On the other hand, companies with a high market risk tend to have a lower technology risk, but face more competition. The big “if” in this case is whether the company can convince enough consumers to use their products or services since similar solutions already are (or soon will be) on the market and vying for consumers’ attention. Therefore such startups require significant capital for marketing purposes. These companies are usually consumer-facing (B2C) as opposed to companies with a high tech risk, which are usually B2B.
Why focus on technology-driven Swiss startups?
Given Switzerland’s robust technology ecosystem, it makes sense that investors mainly consider investments in technology-driven startups (both tangible and digital). Switzerland consistently obtains high scores in various innovation rankings and is home to leading universities and research institutions such as the ETH in Zurich and the EPFL in Lausanne that are working on cutting edge technologies and attract top talents from around the world. Both the ETH and EPFL actively support the foundation of spin off companies based on research achievements that have the potential to become commercially viable.
As an investor you need to understand in which fields Switzerland attracts the brightest minds from across the globe and focus on these clusters. While the next Facebook or Google may be unlikely, Switzerland has already produced some highly successful companies in other fields such as high-tech, medtech, pharma, biotech and finance.
Why avoid Swiss startups with a high market risk?
As mentioned above, startups with a high market risk require significant funding for marketing purposes and Swiss startups are unlikely to raise the growth capital necessary to stand a chance against the stiff and well-funded competition they face internationally. As opposed to the US or other large markets, there are not many VCs in Switzerland (or continental Europe for that matter) that provide startups with serious growth capital of more than 10 million (it is already a challenge to raise 3 million). The number of Swiss consumer-facing startups that have managed to raise such amounts are few and far between. Technology-driven startups on the other hand (with the exception of biotech and pharma) can obtain proof of concept and become interesting targets for acquisition by large players with less funding.
Switzerland is rich and its consumers have a lot of disposable income. However, Switzerland is also tiny. In order to really make an impact, companies need to look beyond the Alps from day one. The problem with looking beyond the Alps is what you then see is a fragmented European market. So not only is it difficult for consumer-facing Swiss startups to raise the necessary funds to stand a chance internationally, they then need to conquer numerous markets simultaneously which is an immense challenge that their US counterparts do not face. In contrast, a B2B tech startup can cover larger geographic markets through a small number of big clients or industry partners.
Knowing when to cut your losses
Another factor makes startups with a high tech risk interesting from a private investor’s perspective. If the technology doesn’t work, you cut your losses and call it a day. With a high market risk startup, it is much more difficult to realize when that moment has come. And since the large majority of startups fail, knowing exactly when to jump ship is a key advantage.
There will always be exceptions to the rule, but don’t count on it
If you are hoping to catch a unicorn in Switzerland, don’t count on it. Instead you will find solid technology-driven companies that operate in niches that most consumers don’t even know about, but that are highly interesting for the unicorns of this world. This does not mean that consumer-facing startups that require large financing rounds don’t stand a chance (a number of Swiss startups, such as GetYourGuide, HouseTrip and Knip have secured large sums from VCs in recent years), or that companies that focus mainly on the Swiss market will never make it big (jobs.ch and digitec are two examples of companies that had a profitable exit despite a focus mainly on the Swiss market). There are always exceptions to the rule and this is especially true for startups. However, given the general high-risk nature of startup-investments, it makes sense to reduce the risk wherever possible and play to the strengths of a particular market.