Thoughts on the Swiss startup & tech ecosystem flywheel
From a macro perspective, Switzerland has great prerequisites for a flourishing startup and tech ecosystem: It has been the most innovative country many years in a row according to the Global Innovation Index (GII) 2020 of the World Intellectual Property Organization, scores third in the World Happiness Report of 2020 and was just named Europe’s Innovation Leader 2021 by the European and Regional Innovation Scoreboard. Switzerland has the second-highest gross domestic product (GDP) per capita in the world and a very high standard of living. The average life expectancy at birth is almost 83 years. Looking at R&D spending in Switzerland, it amounts to over 3 percent of GDP or around CHF 22 billion. The Global Entrepreneurship Monitor 2019/2020 concludes, that the entrepreneurial framework conditions in Switzerland are high as the country achieves great results in commercial infrastructure, tertiary education, finance, knowledge and technology transfer as well as government programs.
The big question to ask then is if these favorable prerequisites actually translate into big entrepreneurial successes? And how does the tech startup founding and funding situation look like in Switzerland then? In 2020, CHF 2.1bn ($2.3bn) was invested in Swiss startups over 304 financing rounds. According to the Swiss Venture Capital Report, the largest funding rounds in 2020 were Sophia Genetics & VectivBio (both CHF 110M) and Monte Rosa Therapeutics (CHF 89M). Unsurprisingly, Biotech, ICT and Fintech are the sectors receiving the most funding. The main hub for the Swiss tech scene is Zurich, with 113 financing rounds happening in 2020. The canton of Vaud (Lausanne and Geneva mainly) follows suit with 55 financing rounds. Lastly, there are currently 4 VC-backed companies valued at over $1 billion in Switzerland (Roivant Sciences, Dfinity, Nexthink, MindMaze). Two other unicorns, namely Wefox and GetYourGuide are not completely straightforward: while both were founded in Switzerland, they have since moved main offices and operations to Berlin, Germany.
Sounds good? Yes, it does! There are some great individual success stories, competent angel investors and VCs as well as good initiatives to support founders on their way to build big companies. However, when taking a comparable country like Israel in terms of size (9.0M inhabitants in Israel vs. 8.5M in Switzerland in 2019), R&D expenditure as a percentage of GDP (4.95% vs 3.8% in Switzerland) and the lack of natural resources until recently, the state of the Swiss startup and tech ecosystem is rather sobering: there are currently more than 30 tech companies in Israel that are valued over $1 billion, and Israeli tech firms have raised a record $9.93 billion in 2020, up 27% year on year, in 578 transactions.
We are aware that a startup ecosystem has many interdependencies: startup founders and their peer groups, funding from angels and VCs, commercial and technical talent, and an entrepreneurial mindset. These parts all depend on each other in order for the ecosystem to work and for the startup & tech flywheel to turn, as illustrated on the left. The purpose of this article is to discuss different aspects of the Swiss startup and tech ecosystem and to draw on some examples from the “Israeli Startup Nation” to learn from.
👥💸 Founders and funding
A startup ecosystem needs big liquidity events in the form of M&A transactions or IPOs (i.e. exits) to drive positive feedback loops by way of know-how, network and money. In case of a successful exit, the startup’s founders and early employees are rewarded both financially and emotionally and can either build their next ventures or start investing themselves as Business Angels or VCs. Angels who have founded and grown a startup themselves have a deep understanding and empathy towards what founders really need in order to build and create something.
When looking at exits in Switzerland, the Swiss Startup Radar shows that the growth of exits is smaller than expected considering the funding and founding boom which exists since 2005. In 2019, there were a little more than 30 exits in Switzerland, mainly in the ICT sector. Overall, about 300 startups have been sold in the past 15 years with an average of 20 per year. Data from 2018 showed, that the biggest exits (i.e. being more than $100M) were mainly in the Pharma and Biotech industry. Only 12% of exits above $100M were in the software industry. What is striking is the lack of a second exit alternative in the form of an IPO, as there were only a little more than 20 IPOs over the past 15 years by Swiss startups.
Comparing this to Israel, startups grow much more aggressively in Israel and are realizing liquidity events faster (8.7 years compared to 10.9 years in Switzerland). Despite the fact that M&A activity was lower compared to 2019, Israel still counted 93 deals with $7.8 billion. As IPOs became an attractive exit alternative, Israeli companies made 121 funding deals on the Tel Aviv Stock Exchange and global capital markets, raising a total of $6.55 billion.
Yet, there are some good Swiss examples to illustrate this positive feedback loop despite the (still) lack of big liquidity events: some early employees of the meeting organizer platform Doodle went out to found new companies while others like its founder Myke Näf became active business angels and/or investors with their own funds (see Übermorgen Ventures). The same goes for two of the three Wingman partners, with Pascal Mathis having co-founded GetYourGuide and Lukas Weder being the Co-Founder of Eat.ch. Jeremias Meier, Co-Founder of Bexio is now also Operating Partner at session.vc. Even before a potential exit, scale-ups play a significant role in advocating an ecosystem: Beekeeper, the secure employee app which has raised $86M to date according to Crunchbase, has also launched its Frontline Future Innovation competition, an accelerator program for companies operating in the areas of Upskilling & Training, Employee Lifecycle Management and more.
Looking at the startup’s investors, they are also rewarded with both cash and experience, potentially raising their next funds on these successes and becoming stronger supporters within the ecosystem. Overall, the Swiss seed and early-stage funding ecosystem has recently been enriched with two “dorm room funds”: S2S Ventures and the Wingman Campus Fund. They both want to bring the career path of VC and entrepreneurship closer to students at various Swiss universities. The seed and early stage funding ecosystem is further supported by professional investors like Tomahawk, SeedX, Wingman Ventures, Equity Pitcher, btov, Redalpine, Ringier Digital Ventures* and Lightbird* among others.
Another way to describe these positive feedback loops is with so-called “startup mafias”, a term stemming from the PayPal mafia back in the 2000s, when early PayPal employees ended up building, running and investing in companies like SpaceX, Tesla, Lyft, Youtube, Pinterest and more. In Switzerland, the first generation of startups has resulted in a broad range of “startup mafias” (credits to Swisspreneur) with early employees and investors from DeinDeal, unic, Namics or foodpanda (and jobs.ch, Scout24 as well as local.ch to add a few more) building their own ventures and/or backing their fellow colleagues. These companies serve as role models for future founders.
One last point to make is that there is a vast range of different consulting and coaching opportunities, awards and support initiatives, incubators and accelerators, information platforms and associations to be found in the Swiss startup and tech ecosystem. While it is great to see a broad network of support for founders, this can also lead to a lack of founder focus.
🧠Talent
The second important lever for the ecosystem flywheel to turn is access to a strong pool of talent — both commercial and technical. With its world-class universities, Switzerland has the best prerequisites for obtaining sustainable access to highly qualified young professionals. Regarding commercial skills and know-how, the HSG with its renowned programs provides an essential pillar. Concerning the technical talent pipeline, ETH and EPFL are among the global top 50 universities in computer science with an increasing number of spin-offs in the last years. Among the more than 800 ETH and EPFL spin-offs to date, more famous examples are Planted, 9T Labs, Oxara, Archlet, Futurae, Archilyse, Lunaphore Technologies, Faceshift (acquired by Apple in 2015) and Nexthink (Switzerland’s latest unicorn as of February 2021).
Yet, choosing entrepreneurship as a career path is still not that popular: the Global Entrepreneurship Monitor 2019/2020 found that only 40.2% of Swiss inhabitants view entrepreneurship as an interesting pathway for one’s professional future compared to 85.8% in the Netherlands or 69.2% in Canada. Students at specialized higher education schools and Swiss universities also have an entrepreneurial spirit which is below the international average (CH: 20.1% vs. Int: 34.7% five years after the end of studies). What’s more, talent in Switzerland is expensive: a software engineer in the Zurich region earns on average $115k. Switzerland also has a lot to catch up regarding gender equality in the tech and startup ecosystem: only 24% of software developers are female, ranking second-last according to an overview on European countries with more than 8k software developers in the State of European Tech Report 2020. In the same way, funding into mixed or purely female founding teams has also been very low, attracting only 17% of total funding between 2016–2020. The Female Founder Map initiated by Impact Hub Zurich and ZHAW wants to address this issue by bringing more transparency to the ecosystem. Lastly, we believe that role models like Melanie Gabriel (Co-founder & CMO at Yokoy), Yoko Spirig (Co-founder & CEO at Ledgy), Léa Miggiano (Co-founder & CMO at Carvolution) or Arijana Walcott & Sophie Lamparter (founders and investors at Dartlabs) play a crucial role in attracting a broader set of talent into the ecosystem.
In Israel, students are exposed to advanced computing studies from an early age and traditional jobs have lower salaries compared to software and tech, making it an attractive industry to work in. There are over 300 R&D centers located in Israel, and a lot of high-tech development comes from the Israeli military intelligence units (IDF). The military thus serves as an important startup incubator and accelerator. While both countries provide quite a high amount of grants to early stage companies, there exists a difference in government innovation funding: In Israel, government innovation funding can go directly to a private entity or a startup, whereas in Switzerland these government grants are given to researchers at higher education institutions to complete projects by collaborating with private companies.
🦸🏼♀️Social norms
The last aspect to consider when discussing the Swiss startup & tech ecosystem flywheel are the social norms that exist when thinking about starting and building a company. With approximately 8.5M inhabitants (2019), Switzerland lacks a large home market. This would imply that founders think big from the start, wanting to build products for the bigger markets in Europe to achieve the necessary scale for venture returns. As Alex Danco puts it:
Startups are a bet that the future will be radically different from the present, and they are valuable on the way up because they are, effectively, a call option on that future coming true. Their founders set out to discover that future; their value is indefinite, not definite. One day they might become giant, cash-gushing businesses; but not anywhere near your current horizon. Your only goal right now is grow, explore, and earn the right to keep growing and exploring.
This mindset is critical to put VC money to work. However, the Global Competitiveness Report of the WEF has criticized the lack of entrepreneurial risk-taking in Switzerland — in the category in which Israel is by far the leading country. This is also shown in the total insurance premium per capita, which is at $6’835 in 2019 for Switzerland, only topped by four other countries. The opportunity costs of working at a startup are also high in Switzerland: the gross monthly wage median in 2018 was $7'116, making it very attractive to work at a well-paid corporate position with a great work-life balance and even more corporate benefits instead of a low paid early-stage startup with a mediocre MVP. This also leads to probably the biggest differentiator of the Swiss to the Israeli startup and tech ecosystem: Israel’s mix of questioning culture, and appetite for risk among others makes for a fertile place for fast-moving companies to appear.
⛰️Concluding thoughts
To sum up, an ecosystem relies on many different parts to interact with each other in order to mature, i.e. startup founders and their peer groups, funding, talent, and social norms. It’s still early days for the Swiss startup and tech ecosystem but there are good signs that it’s moving in the right direction: The first generation of entrepreneurs has paved the ground for a strong second generation of startup mafias to emerge such as Beekeeper (Yokoy, Angle Audio), Teralytics (decentriq), Climeworks (neustark), and Dacuda (Locatee, PXL Vision) attracting funding from international VCs. The funding landscape is also slowly becoming more operational with Business Angels like Bettina Hein (Founder & CEO of juli), Nicolas Bürer, Jeremias Meier (Co-Founder of Bexio) or Laurent Decrue (Founder of MOVU) being active in the space. However, we still believe that there need to be more and bigger liquidity events, an increasingly operational and diverse investor community, and a cultural shift towards a stronger risk appetite and entrepreneurship as an aspiring career path for the Swiss startup & tech ecosystem flywheel to take up speed. Let the ride begin 🐱🏍!
