Swiss venture capital: small but perfectly formed?

Although the venture capital market in Switzerland is small compared to that of its neighbours, the number of funds based there has increased in the last four or five years and firms there have seen a steady flow of deals.

Bernard Dalle is an IT partner at Geneva-based venture capital firm Index Ventures, which closed its third fund at $300 million last summer and is about to open a London office. He says the market is now more competitive: “There are five or six main funds here but we rarely compete with another Swiss fund for a deal.” Swiss deals have attracted foreign investors such as The Carlyle Group, which last month invested EURO20 million in Opto Speed, a seven-year old company that develops and manufactures opto-electronic components. The company was a spinout of the Institute of Quantum Electronics of the ETH Zurich.

Other university spin-offs funded in the last year include u-blox, which also originates from Zurich and develops miniature Global Positioning Systems receivers. It received CHF20 million (EURO13.7 million) from 3i, Partners Group, the Zurich Cantonal Bank and Innoventure Capital, a subsidiary of Credit Suisse. GigaTera, another opto-electrical company based on research done at Zurich, received $9 million in two rounds in 2001. According to Dalle, the Ecole Polytechnique Federale de Lausanne (of which he is a graduate), is also a good hunting ground for potential spinouts and there is a strong biotech deal flow from around Basel. With large research-orientated companies like Roche and Novartis present in Switzerland corporate spin-offs are also big business as far as Swiss venture capital is concerned. This trend is further encouraged by the activity of corporate venture funds, such as those run by Novartis and Nestle.

Dalle says: “Switzerland is strong in physics-related science such as opto-electronics and semi-conductors.” However he is not an advocate of the recent nano-technology trend, which Switzerland, with its tradition of precision engineering as required by the watch-making industry, is well positioned to capitalise on. He believes the sector is over-hyped: “Maybe it’s a good sector to invest in for those who want to take the extra risk for the chance to make 100 times their money.” The Centre Suisse d’Electronique et de Microtechnique in Neuchtel has produced companies such as Xemics, which in November raised $6 million for its work specialising in short-range wireless connectivity solutions, and Colibrys, which raised $12 million in a first round in the summer of 2001. It supplies Micro Electro-Mechanical Systems (MEMS).

Switzerland is also active on the biotechnology front. Already this year Cytos Biotechnology has secured a further CHF45 million (EURO30 million), bringing the total raised by the company to an impressive CHF106 million (EURO72 million), to develop therapeutic proteins for the treatment of chronic diseases. The Speedel Group has raised CHF22.2 million (EURO15.2 million) for the development of cardiovascular and metabolic drugs. ESBATech, a functional genomics company spun-off from the Institute of Molecular Biology of the University of Zurich, raised a second round in October 2001, from investors including the Novarits Venture Fund. However, the largest early stage fund raising in 2001 was completed by Digiplex, which raised equity of EURO50 million from The Carlyle Group and Providence Equity Partners as well as EURO40 million in debt. Digiplex provides colocation services or “Internet hotels” across Europe.

Despite Switzerland’s fertile VC territory, Dalle says only around ten per cent of Index’s investments are local, although he adds: “We’d rather do a deal here if it meets our criteria.” Germany, France and the UK are also popular destinations for investments from Swiss funds, however not all have that choice. Some funds, such as Renaissance Technology I managed by Venture Partners, are partially restricted to investing in Switzerland due to regulations governing how money raised from Swiss pension funds is invested. Dalle concludes: “Switzerland has proven to be an effective place to be based, we check every year by looking at deal flow to see if we’re missing deals elsewhere.”

Switzerland has strong fundamental technology but one of the downsides of venture capital investing there is the lack of an entrepreneurial culture. Dalle laments this as it means it is often difficult to build teams and talent has to be imported, which despite the appeal of Swiss life is not always a simple process. Although the VC market is fragmented and the less than abundant Swiss entrepreneurial spirit can be blamed for this, Dalle does not think that more growth is necessarily needed as there is already enough capital available for the interesting deals.

At this time the general feeling, among both VC and buyout funds, is that Switzerland is not suffering as a result of being outside the Eurozone. Dalle says: “We’re not at a disadvantage at the moment, maybe if the European markets developed a single market on a par with Nasdaq it could become a problem for Switzerland.” Index has a couple of companies looking for IPOs at the moment but if it does make an exit in the next six months it’s more likely to be through a merger than a floatation.

Dalle’s one gripe is that the industry would benefit from professionalisation. He says business angels, more than venture capitalists, have shaped Swiss investment culture, which despite its truly pan-European character has probably been influenced more by the West Coast of the States than any single European country. According to Dalle, some private individuals who do not have the same deal-making skills as VCs have damaged the industry by investing in start-ups at high valuations. In his opinion entrepreneurs need to be better educated about the process, including the problems unrealistic valuations may cause later. “Some angels are not as discriminating as VCs, they’re not looking for the same returns. Their interest is in building companies not IRRs.”

Despite the relatively limited development of venture capital in Switzerland, the country boasts not only its own industry association (SECA, the Swiss Private Equity & Corporate Finance Association) but also Le Reseau (The Network). Le Reseau is a non-profit making organisation, the founders of which include business angels, VCs (Neil Rimer of Index and Olivier Tavel of Venture Partners), as well as representatives from multinationals, research institutions and private banks. It was formed to develop the country’s high tech industry and together with SECA has been lobbying the government about a number of recommendations, with some successes.

The list of items about which the Swiss government has been lobbied is a long one: the removal of tax barriers to the formation of VC funds, the re-examination of State subsidies for start-ups, the modification of rules to facilitate Swiss pension funds’ investment in VC, the modification of tax on stock options to attract personnel, changes in the role of university technology transfer offices, the simplification of the formation of new companies, the creation of tax incentives for those investing in seed funds and the relaxation of laws regarding the approval of certain work permits. The existence of such an organisation, despite the number of its grievances, is surely a positive indicator for the future development of venture capital in Switzerland.