Venture-funding in the Swiss startup ecosystem is at an all-time high, with a record-breaking CHF 1.24 billion invested in 2018. In parallel, the number of new funds and the fundraising volume is also exploding- with close to 20 VC funds expected to close in 2019-2020, bringing an approximate CHF 2 billion in liquidity to the market.
High-profile exits and startup success stories such as Bexio’s exit to Mobiliar for a reported CHF 130 million is spurring a new VC el dorado in Switzerland. Suddenly, even pension funds and banks are partnering with venture capital funds to grab a share of a new, and potentially lucrative investment segment- following in the footsteps of highly active corporate investors such as Swisscom, Bayer and Novartis.
However, despite startup exits being one of the most important indicators of the health and innovativeness of our startup ecosystem, and THE liquidity event that gets investors on-board in the first place, we know very little about Swiss startup exits. Most trade sales are shrouded in secrecy, with the disclosure of the sale price being the exception, rather than the norm (a trend we also find with the disclosure of capital raised by a startup). IPO’s are few and far between (only 7 in 2016 to 2018) and primarily concentrated within life sciences. As we seek to grow the global visibility of our startup ecosystem, our digital competitiveness, scale our startups and attract world-class talent, entrepreneurs, startups and investors to Switzerland- we need to pay more attention not only to the types of startups we invest in, but increasingly to our exit market- and how it affects the sustainability and disruptiveness of the startups we fund.
By analyzing startup exits using data from the Swiss Venture Capital Report from 2016 to 2018- I wanted to gain more insight on some particularly important startup exit indicators: their age from founding till exit, industry, their stage, and the amount of funding they had raised. By better understanding the underlying demographics behind exited startups, investors can not only anticipate future returns, but identify peaks in performance, valuations and industry preference that can have a multiplier effect. In addition, I strongly believe that patterns in exits has a cause-and-effect impact on the startup ecosystem: on both the type, quality and mindset of startups we create, and entrepreneurs that raise funding.
The data resulted in some telling insights. Swiss startups (agnostic of industry) averaged an exit age of 7.4 years- however this varies considerably by industry- with software startups exiting after 6 years, and fintech startups after just 4.4 years. Prior to exit, startups raised an average on CHF 21 million, considerably below the global average of $41 million- but not surprising considering the most exits can be found among startups who have raised either a Seed or Series A round. Unsurprisingly, the sector with the most exits by deal count is in the software space- equaling to 38 deals- or 47.5% of all exits since 2016. Over 78% of startups are B2B- and it is without surprise that over 91% of exits are through a trade sale- with only 7 startups having IPO’d since 2016.
This confirms an opinion I’ve been voicing within the startup ecosystem. Swiss startups are exiting at a faster, and younger rate than their global peers- and whilst this may seem indicative of a healthy ecosystem- it brings to light mid to long-term concerns over this trend’s sustainability- specifically if we lack an active IPO market.
Speedy exits- for better or for worse?
In 2018, the average time from founding to exit for Swiss startups was 8.4 years- up from 7.4 years in 2016. However, the total disclosed funding raised by exited startups has decreased from CHF 260.6 million in 2017, to CHF 160.6 million last year.
Whilst on a global benchmark, the exit lifecycle of Swiss startups is well within the average- this is because it is inclusive of all industries- including life sciences, biotech and medtech- who traditionally have much longer commercialisation curves. If we dig a little deeper into the data- and look specifically at time-to-exit by industry, this is when we can observe notable differences. Medtech and Nanotech startups have the longest lifecycle from founding-to-exit- averaging over 10 years each. On the opposite spectrum, Software startups exit after 6 years, whilst fintech startups exit after an average of only 4.4 years.
At first glance, an average exit of 4 years for a fintech startup is undeniably positive for early-stage investors. Who doesn’t want to see such a quick return when the average investment gestation period lasts at least 7 years? But are these startups delivering the biggest bang for their buck? Could they have held tight a couple more years and achieved higher multiples- both for founders and investors? And critically, for an economy who is betting on startup innovation to fuel economic growth- are they creating added-value, specifically in terms of jobs creation?
The corporate PoC conundrum- to grow or not to grow?
In an article I wrote last year, I highlighted how corporate venture capital was driving up valuations due to their inherently strategic nature and lack of focus on financial returns outside of core business diversification. This is particularly true for Switzerland, and a trend that has been picked-up on by savvy founders. The swiss pre-seed and seed startup lifecycle in the B2B space is relatively simple- and a key measure of traction that fuels early-stage investors. Create company. Prototype product. Seek a large PoC (proof-of-concept) partner. Invest. Develop and customize MVP for PoC partner (at a substantially preferential price). Deploy PoC within corporate setting. Invest. Repeat. Become unofficial sister company of corporate partner. Get acquired.
With corporate investments representing nearly a third of all venture capital investments in Swiss startups- it comes as no surprise they are highly desirable strategic investor and exit targets.With B2B software and fintech startups particularly prone in leveraging corporate PoC partnerships- we’re seeing this trend reflected in their last funding stage prior to acquisition. As we can see, the vast majority of startups between 2017-2018 exited between Seed and Series A stage- mere toddlers to their international counterparts. Of course, corporate capital and M&A can’t be held solely responsible for early exits. A lack of growth-stage capital remains intrinsically linked. Whilst early-stage capital is prevalent (even, arguably flooding the market)- anything that doesn’t fall in the life sciences category and demands a ticket of over CHF 10 million becomes inherently difficult for a startup to raise domestically. If we add to the mix a very small IPO market, and a well established risk-aversion from both sides of the table- it is no wonder startups are being signalled into early exits from both investors and corporate partners.
Betting on software
Not surprisingly, if you’re looking for a quick exit- or need inspiration of where to best place your bets- software startups are the place to go in Switzerland. For three consecutive years, software startups represent close to 50% of all Swiss exits (55% in 2016, 43% in 2017, and 46% in 2018)- across 38 rounds in the same period.
In total, from 2016 through to 2018, exited software startups raised total funding of CHF 106.5 million, and individually an average of CHF 8.8 million. In contrast, and strongly linked to their short exit lifecycle, Swiss fintech startups on average each raised CHF 13.85 million, with a total disclosed funding of CHF 27.7 million. Like their software counterparts, it comes as no surprise they remain a firm favourite among the investor community. A fast-paced exit market, coupled with strong corporate support in an industry which is the very foundation of the Swiss economy- this is just the peak of the iceberg.
Let’s remove the gloss for a minute and examine some bare facts:
We have an active, but very early-stage exit market
Across 3 years- we only have 6 IPO’s for 82 exits
Funding volume prior to acquisition for non-life science startups remains low
Exits are concentrated primarily across 4 industry verticals
Consumer-oriented startups represent less than 20% of exits
Acquisitions are dominated by foreign buyers, not Swiss players (15% disclosed exits are from Swiss companies).
In itself, this isn’t overly negative. We have to take into account that the Swiss startup ecosystem as it is today- is still relatively nascent- and that the capital and infrastructure hasn’t yet caught up with the need of scaling technology startups. However, to remain competitive domestically and globally- our first focus should be on diversity. More diversity amongst investors, more diversity in the availability of growth-stage capital, more diversity in liquidity events, and more startup diversity in the key industries Switzerland is betting on for the next 10 years. We also need to start disclosing our investment and liquidity events so that we can identify gaps in the market, assess the true potential of a startup, and optimise valuations across all stages. Only then, can we create a healthy and balanced exit market that supports the scaling of growth-oriented startups, and in turn- attracts global founders and investors to our technology hubs.
All data used was derived from The Swiss Venture Capital Report 2016-2018. The data only includes disclosed funding and exit rounds. If a startup you know that exited wasn’t included? Start disclosing! Want to access the data (upon popular request)- here is the Google Sheet.