Dynamics shaping Switzerland’s startup ecosystem.
Disclaimer: I am a founder. I founded Rosie (projectrosie.ch) an early stage EdTech startup focused on cutting edge mobile technology to teach kids about science. In this blog, I will write about what Switzerland (and more specifically Zürich) is doing right and wrong on its path to creating world dominating startups.
If you are a founder reading this, it will inform you about the most common supportive structures and financial structures you will encounter when starting up in Zürich. If you are a VC or an angle you will get the first person view of a founder and get an overview of what we as a whole are doing right and where we can still improve.
What makes Silicon Valley the center of the world?
I want to start by calibrating our mind. When comparing things we need to have a reference. For this blog, it must be: Silicon Valley.
However, I do not want to spend a lot of words on answering this question because a) it has been answered 1000s times before and, b) the answer is obvious.
The most common reasons mentioned are Silicon Valley’s talent, network, and money. While this is certainly true, I argue that this top-down view is masking the real reasons. Silicon Valley’s world dominance comes from the unmatched capability to scale companies to a global scale very, very quickly.
The ability comes from coupling the mindset to tackle problems at a global scale early on, and the vast amount of resources present in the area to fuel such ambitions. Resources are not just of monetary nature — I will be discussing this point in depth later on.
This short glimpse into what makes Silicon Valley the center of the world is enough for us to understand what Switzerland is doing right and wrong.
What is the current state of Switzerland’s startup ecosystem and dynamic?
This will be a one sided look at the challenges of creating a thriving startup ecosystem as I will not be discussing political issues governing Switzerland’s startup scene — they are too vast to be considered in the same blog. My view is through the lens of a founder who understands the talent, network and monetary dynamics governing a startup ecosystem. This is what I will be discussing.
Following record levels of financing activity and proceeds in 2014 and 2015 on a global scale, the venture capital market cooled in 2016. It showed a decrease in the number of financings and a contraction in valuations. Switzerland, on the other hand, seemed to be comfortable in times of winter and grew its venture activities strongly. However, the growth was not led by our domestic players, most of them sat tight on the bleachers. About 70% of growth came from abroad. But despite the lion’s share of investments coming from foreign investors, I argue it is healthy progression for Switzerland in more than one dimension.
Why 900M of invested capital is significant for Switzerland
The investment volume increased from around CHF 300M in 2012 to CHF 900M in 2016. Investors tripled down on Swiss startups in just 5 years. Albeit 900M seems still like a small number compared to the big players, it signifies a much more drastic societal shift than an outsider could deduce from looking at the numbers — it gives insight into one of Switzerland’s major problems in the race to startup-dominance. Here in Switzerland, we are not used to investing in high-risk projects, there is essential no risk-capital. Why should we, in Switzerland all is safe, birds are chirping, and the sun is shining even when it rains — why risk anything? It is just not Swiss, however, the investment volume shows a definite change of mind in Switzerland’s investors. They came to understand that investing in startups may be risky and expensive (tax issues), but it is the best way to invest in the future. Minds are changing and are redefining societal norms. A new culture emerges bringing along new opportunities for all members of the group.
This new mindset begins to flourish as nationwide investor networks begin to form. Society3 and SICTIC are amongst the most promising new networks. One could compare them to real-life angle syndicates which take on the role to educate wealthy individuals who are eager to invest in the future and facilitate access to the deal.
Side note: Access to the deal is not as difficult as in other startup hubs. World-class talent is still somewhat accessible for new investors.
Other entities such as VentureKick, which is a philanthropic initiative of a private consortium, are playing a significant role when it comes to educating investors and startups alike. In fact, I would argue that Beat Schillig and Jordi Monserrat (founders of VentureKick) together with the Commission for Technology and Innovation (a state run initiative to support innovation via entrepreneurship) are nurturing the ground for startups to grow in. VentureKick just announced their 500th startup invested in and an overall investment volume of CHF 20M since it was created in 2007. The ticket size might not be staggering, but the amount of tickets are.
A further initiative to provide nurturing grounds for startups is Zürich’s first startup accelerator. It has gotten the support of many major players of corporate ventures, VCs, and universities. It is the first startup accelerator in Zürich and is pushing full force to democratize access to talent, mentorship, industry, and investment. The Kickstart Accelerator.
The Kickstart Accelerator just launched its second batch so it might be too early to assess its impact on the ecosystem — but on a smaller time frame, positive effects can clearly be observed. In 2016, they brought several foreign startups to Zürich and made them stay. They have put together an impressive group of mentors and are allowing for creative energies to meet and create bigger and better companies faster. This is a very promising trend as I will be discussing the necessity for such networks later in the blog.
Side note for founders: The Kickstart Accelerator provides equity free money!
Another encouraging phenomenon happening is that corporate ventures are sprouting all over the country — albeit having their own agenda, they are pumping early money into the ecosystem and providing supportive measures that are needed by startups. Most notably opening up otherwise closed industry sectors, such as banking or insurance.
In no particular order and in a none-exhaustive manner a list of top players can be found below.
Ringier Ventures, Zürich Kantonalbank (Bank of the canton of Zurich), Swisscom Ventures, Post Ventures, Zühlke Ventures, Axa strategic ventures, Tamedia.
All of the corporate ventures mentioned have recognized that Switzerland’s startup ecosystem needs more professional support. However, more encouraging than the financial support given by such ventures is the demonstration of forwarding thinking CEOs.
In particular, I do want to give credit where credit is due and mention Marc Walder (whom I do not know personally). He is the CEO of Ringier and the initiator and board member of digitalSwitzerland. DigitalSwitzerland is a cross-industry association with the vision to position Switzerland as a digital hub. The members of the board are world-class and highly competent. The initiative will be/is critical for Switzerland’s future startup success. I will not be discussing digitalSwitzerland any further as their activities (such as the mentioned Kickstart Accelerator) are too important to be addressed in a side note. A blog for another time.
A further pillar of financial support is represented by family offices and venture capital firms. In fact, Switzerland could be compared to the Upper East Side, it thrives on old money. The investment volume of Swiss family offices is striking and definitely moves the needle. As family offices tend to stay under the radar, I will not name them in this blog but name some of the bigger VCs playing the game.
Again in no particular order and in a none-exhaustive manner, a list of the big venture players operating in Zürich can be found below:
Creathor Ventures, RedAlpin, investiere, Centralway/Saidler & Co., Index Ventures, BlueOcean Ventures, 3wVentures.
A quick special shoutout to investiere, which is one of the leading startup investors in Switzerland with more than 50 financing rounds. Investiere was able to get NEST, a Swiss pension fund, to systematically co-invest in startups. These are promising signs that the ecosystem is growing and creating cross-industry interest.
Overall, the investment ecosystem of Switzerland is showing healthy growth — with every new investment vehicle, more and more people will feel comfortable to start investing into startups. This is what makes Switzerland so exciting right now, we are clearly still in the slow phase of e^x.
However, early financial support is just a small part of what makes a healthy startup ecosystem.
Finishing off this section, I do need to talk about one particular dynamic that is crippling Switzerland’s effort in reaching the crown. We do not have enough liberated funds to do crucial follow-on investments — the lack of risk capital is disturbing and damaging. It goes back, in part, to the phenomenon discussed above … why risk anything if you live in Switzerland (all political issues set aside).
The problem got so prominent that even Joachim Schneider Ammann, a member of the Swiss National Council and head of the Federal Department of Economic Affairs, Education, and Research, needed to go out of his office and fundraise a CHF 300M fund with the sole purpose to secure follow-on investments in startups. Follow-on investments are important in more than one way. I will elaborate.
Talent and network dynamics
Next to the societal shift of investing into risky young ventures, something even bigger needs to happen. Switzerland needs to keep its talent! We have the best talent in the world thanks to universities such as ETH and EPFL, however, because of the investment situation a lot of it is leaving Switzerland and not coming back. This poses a huge problem in a way that is not entirely obvious. I do not want to discuss the fact of missing vacancies. I am talking about the drain of experience! A huge problem that actively hinders the development of a world-class startup ecosystem and ultimately world dominating startups.
“World-class startup networks are self-reinforcing. They allow for continuous self-taught enhancement.”
Keeping talent means to build up a high-quality memory. The goal is to create a deeply interconnected and self-reinforcing network. Self-reinforcement is achieved by aggregating experienced founders with access to capital and a willingness to pay it forward.
In fact, as hinted above, I argue that self-reinforcement is a key factor in Silicon Valley’s world dominance. In the Valley, people share their experiences by memorizing and enhancing existing playbooks of hugely successful startups. By memorizing and enhancing they reach success faster, stronger and in bigger ways at their next startup. Experienced founders hop from startup to startup — bring along all the knowledge they gathered from their previous ride only so to help reach the Moon (…Mars) that much faster.
Take me as an example. I started my first startup in the MedTech field straight out of University. I was a novice! Never heard of customer development let alone product development. In just under 2 years, I learned life changing lessons. I learned what it meant to raise money, to hire top talent, to manage and lead interdisciplinary teams, to scale offices and operations, to adapt to changing regulatory environments and, ultimately, how to survive the roller-coaster that is everyday startup life. Just after 3 years, I felt ready to board a new rocket ship that is Rosie — and you can bet that I am adapting and enhancing all the playbooks that I have in my backpack. This already led to faster seed funding, faster team scaling, better team management, better MVP strategies, stronger partnerships and to a more robust founding team. Rosie got better, stronger and faster by profiting from experience. Multiply this example by five, ten, or even 15 years, and you see what bleeding of talent really means for Switzerland.
We need founders and early employees to stick around, get vested, and hop over to the next promising startup to share knowledge. If promising startups are leaving Switzerland early just so to survive the upcoming financing round, our astronauts will board American rocket ships instead of Swiss.
This train of thought was the reason for one of my recent tweets where I answered Penny Schiffer’s question as she asked about the missing piece for Swiss startups to compete on a global level. My answer was educated by the reasons mentioned above.
“Switzerland needs to understand that “speed” is a defining element of quality.”
Speed is achieved by talent-hopping. For startups, speed is life. A founder is continuously trying to figure out how not to get caught by the burning rope. Better figure it out fast.
However, to close this blog, I want to say that in my opinion Switzerland is moving in the right direction. The canton of Zürich, together with the canton of Vaud, is spearheading the advancements. If Switzerland stops the talent drain, if people get bolder and more driven, if laws facilitate investment opportunities and if old money begins to invest and believe in the new, I don’t see anyone that will be able to beat Switzerland in the coming 10–15 years.
P.S. If you are an outside investor looking to get that yummy access to the deal — let’s chat! The best founders are still available for coffee and are just one handshake away. As mentioned above, Switzerland’s network is still very small but tight and being a founder from the ETH Zurich, where talent sprouts, helps to get to the deal early. Tremendous opportunity for you as an investor!