16.06.2021
Startups are often rich in ideas – but most of the time they lack the financial means to make their vision a reality. This is where a special type of investor comes into play: the venture capitalist. They have enough money and the risk appetite needed to invest in up-and-coming companies whose chances of success are uncertain.
If you’re considering investing your money on the stock exchange, you will usually decide to invest in the shares of well-established or reputable companies. And for good reason. Investing money independently on the stock exchange is very easy in the digital age: the majority of share prices can be accessed online in real time at no cost, and it’s even possible today to access potential forecasts on expected returns, price trends or the risks of securities at the click of a mouse.
It’s different for startups: for fledgling companies, there is no public trading venue as is the case for listed shares. In addition, the risks associated with these sorts of investments tend to be high. This is because it’s often very uncertain whether a business idea will be a success on the market or not. The companies first have to prove their idea is in with a chance of becoming commercially successful.
This is the reason why startups are the preserve of venture capitalists. Unlike many other more cautious investors, venture capitalists are willing to invest in companies even if their commercial success is not guaranteed. They take this risk because they believe in a startup’s business idea, and one day, they hope to reap the rewards of the company’s success.
A startup goes through three stages on the road to success. The first stage involves looking for starting capital, also known as seed money. At this stage, the startup transforms its idea into a business plan, and starts off by working on prototypes. Around 5 percent of venture capital in Switzerland is invested during this initial phase according to the 2021 Swiss Venture Capital Report.
Next, the startup needs to prove their business idea works and is commercially viable with some initial products. This is the “early stage”, and around 30 percent of venture capital in Switzerland is invested at this stage.
The remaining 65 percent of venture capital investments in Switzerland go towards startups that are already at an advanced stage of development. This is the “late stage”. These companies are usually already making a profit, and in some cases are already considering a stock exchange flotation or selling to a large company.
Investors in the startup sphere tend to be large companies looking for promising startups to acquire, or institutional investors such as pension funds. Most private investors are not permitted to make venture capital investments – unless they are members of an exclusive club of wealthy private investors.
The only people qualified to make such investments are those with funds of at least two million francs. This is stipulated by the Swiss Financial Market Supervisory Authority (FINMA) We can see, then, that crowd investing platforms, which support a host of projects and ideas and are accessible to all private individuals, don’t count as venture capital investments.
The money of these investors mainly goes towards startups in the healthcare and biotech sector, as well as ICT startups, according to the 2021 Swiss Venture Capital Report. The investors often put their money towards innovations that stem from university research, for instance, in cases where scientists and academics want to make their inventions commercially viable as entrepreneurs. Swiss startups received venture capital of over two billion francs for the second year in a row in 2020. That is a striking increase. In 2013, these investments only amounted to about 400 million francs.
The majority of startup investments come from abroad: approximately 30 percent of investments in Switzerland are made by US investors, another 35 percent come from Europe, 20 percent from Asia, and only about 15 percent come from Swiss investors.
While companies can invest in startups directly, institutional clients and wealthy private investors require investment structures that allow them to invest in new businesses. Here are the three most common investment options:
As a general rule, individuals who have already founded several companies and either sold these or successfully listed them on the stock exchange are dubbed “business angels”. They invest part of their wealth in new startups all the time. They usually do this in combination with other serial entrepreneurs. In addition to money, business angels also bring their expertise and experience to startups.
There are companies that exclusively devote themselves to financing and advising startups. They finance a portfolio of startups by setting up a fund. As with an equity fund, venture capitalists can purchase shares in this fund, and by doing so, they contribute to financing all startups held by this fund.
There are also online platforms that recommend a variety of startups to investors. Unlike with funds, investors can actually decide on what startups they would like to invest in themselves, which they can do via these platforms.
If you’re not part of the two million franc club of rich investors, you’ll have to wait to make a venture capital investment. Specifically, until a startup is either purchased by a group listed on the stock exchange, or until it goes public. Generally speaking, we can say that IPOs and company takeovers are the exception – and something only very few startups manage.
