Why Switzerland is an Angel Paradise
Having spent more than 10 years scouring Europe for interesting start-up companies, I have come to the conclusion that Switzerland is literally a paradise for potential entrepreneurial success stories and therefore for Angel investors. Fortunately, not many professionals have figured this out yet, which means that valuations are quite reasonable to this very day.
What are the reasons for such a surprising / provocative statement?
- Outstanding Engineering Schools and other Universities.
The Eidgenössiche Technische Hochschule in Zurich (ETHZ for short) has just been confirmed as the best university in continental Europe at position 12 in the latest global QS ranking (2014). Its counterpart in Lausanne is ranked 17th.The education received at both Polytechnical schools is first rate and still emphasizes traditional engineering skills. As a consequence, the students come up with real engineering solutions for their start-ups, as opposed to the nth variation on social media or apps that seem to have captured the exclusive attention of most American students.Many other Universities and technical schools are located all over Switzerland and management know-how is easily obtained by adding students from acclaimed schools such as IMD, Hochschule St. Gallen, HEC Lausanne etc. to the team.Even the Ecole Hotelière (Hotel Management School) in Lausanne has contributed quite a few successes to the start-up community, which shows to what degree the entrepreneurial spirit has expanded in Switzerland.
- A prudent approach by business service providers and a conservative legal framework.
It takes 25’000 Swiss Francs (currently approx. the same in $ or €) to open an LLC and 50’000 to incorporate. While the funds can be retrieved from the business the next day, this still serves as a reasonable hurdle to discourage the most inept founders.In addition, lawyers and accountants are quite conservative in their outlook, sometimes frustratingly so. The outcome are companies that survive for 8-9 years on average, significantly more than their counterparts in other countries. More importantly, Due Diligence is usually a breeze, since the corporate files are usually in great shape and there are few, if any, skeletons in the closets.In recent years, most corporate docs are being drawn up in English to facilitate communication between Switzerland’s various language regions and to help attract foreign capital. Most terms sheets and investment contracts are modeled after US ones and Swiss corporate and tax laws are relatively straightforward (as compared to Germany or France, for example).
- An innovation ecosystem that has sprouted many shoots.
Ten years ago, it took real courage to start a business in Switzerland. Nowadays, there are so many helping hands that it is almost too easy to get started. Business plan competitions, incubators, accelerators, angel groups, foundations and many others all vie for the attention of the entrepreneur, who quickly will think that he is indeed on top of the world.A particular Swiss variation is the Federal Commission for Technology and Innovation (KTI) and its various off-shoots and associated organizations such as CTI-Startup and CTI-Invest. CTI awards millions of Swiss Francs worth of R&D contracts, which finance the prototypes of many a struggling company. CTI-Startup follows that up with paid-for coaching and mentoring by industry experts through a process leading to a certification, which essentially proclaims that the company is ready for (semi) professional financing rounds.The VentureKick initiative is particularly helpful, as it grants up to CHF 130’000 per company in three rounds of competitive presentations to the best teams. The jury is composed of experts from the Swiss start-up ecosystem and the companies profit immensely from the feedback they receive, even if they do not make a particular cut-off (full disclosure: the author is a VentureKick Jury member).
- An active Angel community
While business angels were a rare breed indeed a few years ago, the successes of a first wave of entrepreneurs and the high salaries of managers in private industry have led to an active angel community, both individually and as part of more organized groups. More recently, the arrival of fundraising platforms such as Investiere has enabled well-vetted companies to reach hundreds of qualified investors, thus speeding up and professionalizing early funding rounds.
- Relative ease in recruiting engineering talent at reasonable rates
While Switzerland is a high cost country as such and wages are therefore higher than in the rest of Europe, fringe benefits are lower and the quality of life in Zurich or Geneva regularly tops global surveys. The workweek is still about 41.5 hours and there are fewer holidays than in many other countries.Berlin might beat Switzerland from a manpower availability and cost perspective, but it is still much easier to find talent in Switzerland than in Silicon Valley or Boston. In addition, once on board, employees tend to be a lot more loyal, so churn is much lower. This partially explains why Google’s largest R&D center outside of the US is in Zurich.Furthermore, for software companies, Eastern Europe with its many qualified software experts is just a short flight away, further keeping costs down.
- Investment terms that are much more favorable to investors than in the US
The current overheated conditions in the US have not “infected” Europe and in particular Switzerland (yet). For comparable companies, valuations are probably 1/3 to ¼ of what they would be in the Bay Area. Liquidation preferences are common and other terms are similar to the US
What’s the downside?
While prudence is good for corporate governance, it is clearly not the defining characteristic of an entrepreneur. Unfortunately, European companies (and Swiss ones in particular) often lack the Marketing and Sales pizazz of their American colleagues. This is a CRITICAL shortcoming, to which various authorities in Switzerland are only paying lip service.
Beyond the seed rounds, fundraising is also quite tedious and often a CHF 1-2 million Series A and a CHF 5 million Series B investment is seen as a great success. When compared to the US equivalents of maybe $5 and $20-25 million, it quickly becomes apparent why US companies end up dominating their European competition.
A related gripe is that the corporate governance resulting from a timid global vision by both entrepreneurs and VCs will lead to small $ 50 million exits, which, while quite lucrative for investors, do nothing to uphold the value of the underlying technology.
Nevertheless, many US investors, faced with steep terms from local entrepreneurs, highly competitive rounds and a surprising amount of legal challenges, could do very well for themselves by spending more time looking for companies in Europe. Before they all show up, I intend to lock up a few more deals for myself.
A short compendium of the Swiss start-up ecosystem:
Incubators and accelerators
Technopark in Zurich & Lucerne: http://www.technopark.ch/en/
EPFL Innovation Park: http://epfl-innovationpark.ch
Swiss PE and VC Association (SECA): http://www.seca.ch