Growth focused-equity for startups

Sparrow Ventures
Feb 4 · 11 min read
Picture by: Annie Spratt

Next to being the innovation vehicle for the Migros-Group through Venture Building, we have a dedicated team to strengthen those undertakings through growth equity investments. Diving deeper into this area of our operations, we take a close look at the Swiss Startup and Investor landscape together with Tobias, who is a Senior Investment Manager on our team at Sparrow Ventures while providing transparency about how we operate, what we invest in, our process and how we support our portfolio companies. Read on for more detailed information below.

What is your take on the Swiss Startup Scene? Where do you think it is heading?

Swiss startups are a vital driver for innovation across sectors. Switzerland itself is a fertile ground for entrepreneurship that has become crisis resilient and continues to thrive. Here, the number of incorporations over the last ten years shows that it is a growing ecosystem that has also contributed to the creation of more than 50k jobs in the country. Even during the challenging economic environment in 2020, the number of incorporations saw, after a slight decline in Q1 and Q2 by -4%, a bounce back, contributing to overall growth of above 5% year over year. When compared to other markets, such as Germany, which experienced a decline in incorporations of -21% during the first six months of 2020, this demonstration of the resilience of the Swiss startup scene is in my opinion based on three pillars:

Despite the pandemic, the money has not dried up. Be it from friends and families, angels, or institutional VCs. If you are solving an interesting problem and assembled the right team to execute, you will get funded. According to the 2020 Swiss Venture Capital Report 2.1 BCHF were invested in 304 deals. That is very close to the 2.3 BCHF in 2019, a record year by itself. Total capital invested in 2020 is even more remarkable when you consider that the largest financing rounds only account for 54% of total volume raised, compared to the 69% in 2019. It seems that the Swiss ecosystem has learned its lesson from the financial crisis in 2008/2009 when the money dried up quickly.

Exit opportunities for founders remain strong. Swiss startups were able to realize between 30 to 50 exits annually over the past five years. Despite the current economic challenges, with 33 exits and two IPOs, the level in 2020 was about the same as in previous years. This provides founders with additional perspectives.

The ecosystem’s resilience is based on its heterogeneity. Crises create friction, new problems arise. This creates business opportunities for new and existing startups. Some of the biggest companies in the world like Disney, Airbnb, or Netflix were founded in a crisis. Having a diversified ecosystem as we have in Switzerland, makes it more likely that at least some startups can excel and also use the turbulent times to their advantage. This is clearly demonstrated in 2020 since 59% of the capital was invested in seed and early-stage rounds, an all-time high.

That being said, this does not mean that there is no room for improvement.

Investor landscape. While leading the way internationally when it comes to fundraising from friends, families, or even angels, as the tickets get larger the number of Swiss investors and their activity decreases. The Venture Capital scene in Switzerland is, when compared on an international level, still young and maturing. The number of professional investors is increasing, especially since 2018. However, only a small portion of investors — roughly 21% — completes two or more transactions in 18 months. Taking a look at other countries such as Great Britain (32%) or Israel (29%) indicates that there is still room to grow. However, the participation of Swiss VCs in 11 of the 20 largest financing rounds in 2020 is a clear indication that the Swiss startup ecosystem is evolving.

Diversity. Also, as in many other countries, there still exists a significant gender gap. While there are some great success stories out there, in only about 7% of Swiss startups women are currently in charge (CEO). This picture is similar when looking at the investment side of things, where it is great to see that more and more women are promoted to partners.

Political support. During 2020 over 430 Swiss startups have received state-secured loans with a volume of +160 million CHF for liquidity management as part of Covid relief packages. While it is fantastic that this financial support system is in place, it is difficult not to notice some limitations when it comes to high-growth companies. Be it for meeting all criteria to be eligible, loan usage restriction, or the “loss of sale” definition for the “Härtefallregelung”.

Finally, keeping all of these aspects in mind and having seen the ecosystem’s resilience, I am very confident for a sustainable future of the Swiss startup scene.

How does Sparrow Ventures as Growth Equity Investor fit into the picture here?

As aforementioned, the investor landscape in Switzerland for the pre-seed and seed phase is well established and continues to grow. It is full of players from grants of various providers, to money from family and friends, over to very active business angels and a fast-growing number of professional Venture Capital funds. However, as the ticket sizes get bigger the number of investors rapidly declines, and often funds from abroad come in to fill the gap. Over the last decade, only 21% of total capital raised from startups comes from Swiss investors. Together with their money and experience they bring rapid global expansion into play and in most cases rightfully so. Yet, this might leave equally attractive startups with a solid business model, wanting to grow specifically in the Swiss- or DACH markets, empty-handed. That is where Sparrow Ventures comes in and is uniquely positioned as Growth Equity Investor. We want and can act as a strong, long-term partner for these startups and help them accelerate their growth close to their home turf. Here our focus areas for investments are, as we belong to the Migros-group, alongside its diverse ecosystem. Furthermore, due to its founder’s philanthropic view — the startup's impact on communities and Swiss citizens, in particular, is paramount. Given that, we prioritize consumer-facing business models that strive to make a positive contribution and operate in the areas of Food & Beverage, Fintech, Digital Health, Last-Mile and Community, Lifestyle, and Happiness.

“What is Growth Equity”: Growth Equity implies that the funds raised are used to accelerate the growth of the startup. Meaning the core product is fully developed and product market fit has been successfully reached. With continued growth, economics of scale can be utilised and a path to profitability is clearly visible.

Why does Sparrow Ventures, as part of the Migros-Group, invest in startups?

Innovation is driven by a number of people and teams within the whole Migros ecosystem. Being part of a big organization can — quite naturally — slow down the decision making process. More alignment equals more stakeholder management, and the more people get involved, the higher the risk that the focus lies on challenges rather than chances and opportunities. That is why Migros decided to create Sparrow Ventures with its growth equity vehicle. We are an autonomous operating team that works strategically aligned with the parent company, but has strong ties to the Swiss startup ecosystem. This setup allows us to be fast-moving, dynamic, and interact with founders on equal terms while being able to open doors alongside the entire Migros universe for expertise, infrastructure, and distribution.

How do we get in contact with startups?

As with any other investor, there are two main ways for us: inbound and outbound. For getting in touch with us, the most obvious way is to use the contact form on our website or cold texting our team directly via LinkedIn. However, if you know someone we interacted with before — be it an investor or another founder — don’t hesitate to ask them to make an introduction. We are always happy to talk to friends of friends. From our end, we also proactively approach startups we come across and find interesting or think could be a good fit for our portfolio. We find those startups either through crawling the web, simply reading startup news, and by being involved and part of the startup ecosystem with participation in events or talking to other investors.

What is Sparrow Ventures looking for in a startup?

Apart from what we are looking for, I would say first of all: Be courageous enough to be different. With this, I do not necessarily mean the problem the startup is solving, rather the way we are approached. We go through +350 pitch decks a year, thus it helps to be a bit different and stand out to catch our attention. That being said, the investment opportunity of course still needs to fit our investment strategy. We focus on startups that are post-revenue, have a consumer-facing business, and are looking for equity to accelerate their growth. Furthermore, we are looking for a complementary and ambitious founder team with a strong vision who are willing to put it all on the line to make their dreams for their startup come true.

So, let’s say there is interest to invest and talks have started. Can you walk us through what a startup can expect from a typical investment process with Sparrow Ventures?

After having received the pitch deck one way or another, and if we are intrigued we set up an initial call with the founding team. The main focus of this call is to get to know each other, understand the business model and the vision. Throughout 2020 we chatted with roughly 100 founding teams. Based on the gathered information the investment team discusses how and to what extent we can assist and contribute, not just as an investor but as a long-term partner to achieve the startup's vision. If both, the startup and us are convinced that Sparrow Ventures can offer more than just money, we intensify our analysis and start term sheet negotiations. Last year, this was done for around one-fifth of the startups we talked to. Once the most important aspects of the term sheets are clear, we start with conducting due diligence in regards to financial, legal, commercial, and tech. In 2020 this was the case for less than 10 investment opportunities. During this process, other stakeholders within the Migros ecosystem might be involved, but overall the startups mostly deal with us, the investment team of Sparrow Ventures. We remain the main contact throughout and make sure that your voice is heard and negotiate the terms. After successful completion of the due diligence and find an agreement on the terms, we propose the investment to our investment committee. This was the case for four startups in 2020, of which to date the investment in VIU Eyewear — got approved. With one transaction still in discussion. Finally, if a positive decision is taken, we can swiftly close and sign the deal and start our common journey.

It is our ambition to close our deals within two months if everyone is able to keep up. :) It is worthwhile mentioning though, that in the end only a few investment opportunities are closed successfully. Many negotiations are either terminated or postponed. Fundraising is a time labor-intensive process for all involved parties, especially startups as they also have to drive their business forward at the same time. We are well aware of that and thus do not want to waste anyone’s time and resources. So expect from us direct, honest, transparent communication and a swift decision-making process.

If all goes well, what can founders of portfolio startups expect from Sparrow Ventures as an Investor?

To start with, we believe being transparent and building a good relationship with each other from day one is paramount. While this of course starts from our very first point of contact and builds along the way, it also continues post-closing the deal. We consider ourselves to be a strong, strategic, and proactive partner for our portfolio companies. This means we want to add value and act with a long-term view. For this and in order to fulfill our promise, we usually take a board seat, providing ongoing support and strategic advice. However, in regards to the operation we do not want to interfere, giving the startup team freedom to operate and stay independent. Moreover, we are the link between the startup and the Migros ecosystem. This reduces on one hand the number of stakeholders to deal with while on the other allows Sparrow Ventures to act as an ambassador for the startup. As such we can open many doors to the Migros ecosystem. May it be in regards to expertise, infrastructure, network, or go2market. Having been entrepreneurs ourselves, we know the fears, challenges, and dreams startups face. Building a successful business is a rollercoaster ride and we are here to help our portfolio to stay on track.

In turn, what does Sparrow Ventures expect from startups in their portfolio?

Apart from the obvious like sharing monthly reports and being well prepared for board meetings, we expect our portfolio companies to act on their promises. Be it not only in regards to growth and the startup's plans for the future but also in regards to our relationship: Transparency, honesty, and direct communication. We are in this together.

Finally, what do you think is crucial for startups to consider when choosing an investor in general?

Let me put it this way: Choosing a (lead) investor is like entering a marriage. Evaluating whether you actually want to marry — and of course — who, typically takes time. This is the same when it comes to choosing the right investor for your startup and the other way around. Therefore it is essential to do your research, read up on the investor and find out if your startup is an actual fit: are they active in the right field and stage, look at their portfolio, talk to the founders of their portfolio companies and brainstorm on how they can help you achieve your vision apart from money. Along the way, identify if there is a personality fit. This can be a game-changer, especially when times are tough.

At Sparrow Ventures we see ourselves as a partner to our portfolio companies on the path to growth. As such, we truly believe in our team and model. Nevertheless, we want to stress the importance of finding an investor that is the best match for your startup. Make sure to find the one that is right for yours. If you think it could be us, let’s talk. You can reach out to us and get connected via our contact form here.

This interview was held with Tobias, who is a Senior Investment Manager in our team since 2019. He is focussing on investments in the field of Food and Beverage, Last Mile, and Lifestyle & Community which are closely linked to his personal interest of living an active and healthy lifestyle but also his professional background in founding his own company and working in corporate finance for multiple years.

This blog post is part of our investment series. Stay tuned for more.

Note: The information in this blog post is provided for informational purposes only, with respect to any other investment strategy or company out there.

Sources:
Startups in Switzerland rise strongly in June
Weniger Kleinunternehmen gegründet
Coronakrise trocknet Startups die Finanzierung aus
Swiss Startup Radar 2020–2021
Covid-19 Rahmenbedingungen der Start-up Bürgerschaften
Swiss Venture Capital Report 2021

Sparrow Ventures

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