In the past, startups raising funds in Switzerland always heard: if you’re looking for a few million Francs, that’s fine, but if you’re aiming for double-digit numbers, good luck with that. The appetite of the local players simply wasn’t that large, people said. Swiss pension funds, who manage more than CHF 800 billion combined, seemed not to care much about venture capital and didn’t understand it either, that was the handy explanation. So, financiers from the US (where pension funds invest around 5% of their assets in venture capital) and elsewhere bridged the funding gap for the lucky few startups who thereby managed to traverse the “valley of death”.

“All of a sudden, growth stage financing is en vogue in Switzerland.”

But all of a sudden, growth stage financing is en vogue in Switzerland. Swisscanto, which belongs to the largest cantonal bank ZKB, raised CHF 150 million for its growth fund in no time, mainly from pension funds. Apparently, they do care about venture capital, if the right institution offers them the right product. UBS and Credit Suisse, not to be bested, push forward with the Swiss Entrepreneurs Fund. With a target size of CHF 500 million, it already gathered the first commitment of CHF 100 million, no small thing. And yet another fund wants to raise CHF 500 million or even more, the “Zukunftsfonds”. All these initiatives come on top of existing growth funds from names such as Aravis, MTIP and Swisscom Ventures.

The big wave
Some have summed up these numbers and have realized that the result is about as large as what was invested in Switzerland in 2018 in total, i.e. CHF 1.24 billion. They see a scary picture emerging, akin to Hokusai’s famous painting: a huge wave of new capital sloshing around just a few investment opportunities. Surely this must all end in a debacle, they conclude. But this line of reasoning is fundamentally wrong, on more than one count.
First of all, the impact of the new funds is smaller than meets the eye. Take the “Zukunftsfonds”. This idea has been around for years, but it is still uncertain if it will actually come to fruition. Regarding the Swiss Entrepreneurs Fund, not all of its money will flow to venture capital in Switzerland. Some of it will be invested in Europe, some of it in Swiss low-tech SME, some of it in other funds. And one thing is true for all funds: Their investments will not be made instantly but spread out over a long investment period of several years. So the fundraising numbers might sound impressive, but all in all, the net contribution to later-stage venture capital in Switzerland will be less than grandiose. investiere estimates that it amounts to around CHF 100 million per year for all the new growth funds (see table below).

But of course, even if the impact is “just” CHF 100 million, this has to be invested somehow. Again, there is a pronounced fear of fierce competition and a bubble. Usually, this fear gripes people that gravely underestimate how rapidly the venture capital sector in Switzerland is evolving. Let’s look at the numbers of the past.

The explosion
In 2018, investment volume stood at CHF 1.24 billion. In 2012, it was only a paltry CHF 300 million. This means that in the last six years, the market grew by an average of 27% in each and every year. The reasons for this impressive growth are manifold. A challenging low-rate investment environment rekindled investor’s interest for private equity. The Swiss startup ecosystem grew, and its actors became more experienced. At investiere, we see successful entrepreneurs turning into startup investors on our platform after they sell their firm. The more successful founders an ecosystem produces, the more experienced startup investors it has tomorrow. On top of that, investors from abroad increasingly discovered Swiss high-tech startups as an interesting target.

“The more successful founders an ecosystem produces, the more experienced startup investors it has tomorrow.”

Now, will the Swiss VC market grow forever at 27% annually, to infinity and beyond? There are many and good arguments against projecting past growth rates blindly into the future. But there is also an example showing that there is still ample room for growth: Israel, a country with about the same population size, a shared orientation towards tangible technology and excellent engineering universities.
In 2010, Israel had a VC market about the size of Switzerland’s last year, i.e. CHF 1.3 billion. From there it grew with an average growth rate of 25% annually to reach over CHF 5 billion in 2018. Israel doubled the number of deals above CHF 10 million in four years. In a maturing market, growth rounds become more important. The same can be said about Switzerland. While in 2012 there was only a handful of rounds above CHF 10 million, in 2018, there were 35, for a total of CHF 900 million. To finance these rounds, large venture capital funds are needed.
If Switzerland is able to follow the same growth trajectory as Israel, what would that mean? This year, investment volume would grow by CHF 300 million to reach CHF 1.5 billion. Next year it would already grow by CHF 400 million, and so on. In other words, the new funds might only contribute about a third of the new capital that is needed to fuel the growth this year. That’s not a crushing wave, but rather one to surf on.
Hunger for capital
We should not forget that there is an increasing number of entrepreneurs in Switzerland who dream large and need large amounts of money to go global: Lea von Bidder, CEO of Ava Fertility, which has raised more than CHF 40 million; Cristian Grossmann, the CEO of Beekeeper, which has raised around CHF 25 million; Johannes Reck, CEO of GetYourGuide, which has raised CHF 170 million; and Tej Tadi, the CEO of Mindmaze, the unicorn based in Lausanne that has raised CHF 110 million. The ranks of this new generation of entrepreneurs are growing, and so are their financing needs. So it would be very welcome to hear that many more growth funds in Switzerland are being launched.

Image: Kanagawa oki nami ura, Katsushika Hokusai, Art Institute Chicago