How to invest in startups?

He is passing through Switzerland to prospect. A partner at the Israeli investment fund Meron Capital, Daniel Roditi (26) is looking for “core tech” start-ups, nuggets that stand out for technological innovation rather than application. In other words: algorithm before software.

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The Geneva native, who has lived in Tel Aviv for several years, hopes to find this kind of expertise in the region. “There is a good ecosystem of algorithmic technologies with polytechnics. Switzerland is ripe for digital transformation.” Created in December, the Meron Capital fund – 70 million dollars under management (67.9 million francs) – has amounts ranging from half a million to 2 million dollars to invest in technological solutions.

Not just science in life

And connecting is the work of accelerator programs like Venture Kick and Venturelab. The founders of the latter, Jordi Montserrat and Beat Schillig, notably organize “roadshows” (tours) in Silicon Valley, New York and China. For Beat Schillig, it is wrong to say that investors only have eyes for start-ups active in the life sciences. “If it were true, Google, Microsoft or Apple would not buy Swiss startups. Investors generally have a very vertical orientation. They scan the globe for the rare pearl in a very specific industry.”

From there, Beat Schillig’s task is to define the investor’s risk profile. “In addition to some business angel beginners, most investors are professionals and prefer a portfolio approach to reduce risk.” The survival rate of start-ups after five years is estimated at 50%. More if they were supervised and trained by an accelerator.

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Among these venture capital funds, we can mention St. Gallen Brains to Venture or Zurich Redalpine, which offer sectoral portfolios of start-ups: medical (medtech), financial (fintech) or industrial technologies. An indirect approach – the holding company invests, according to previously defined criteria, and manages relations with the entrepreneurs – which involves management fees and returns, by definition, less volatile.

Another possibility: take shares in a listed group that will invest in a portfolio of young shoots. Like BB Biotech, and its 3.5 billion francs market capitalization, which finances start-ups active in biotechnology (oncology, cardiovascular, infectious and autoimmune diseases).

Who retain start-ups?

In Switzerland, funds invested in private capital increased from 4.5 million francs in 2009 to 860 million in 2016, according to the latest report by accelerator Venture Kick, which last year tripled the balance sheet invested in its “accelerated” start-ups”. Once a promising start-up moves abroad (whether it’s called Biocartis, G-Therapeutics or Xeltis), the debate about Switzerland’s ability to fund the growth of start-ups reignites.

For Daniel Roditi, this is the natural course of things, given the smallness of the Swiss market and the disadvantage of high salaries. “As an investor, I don’t see why I would pay a premium to keep the R&D structures here when we can do 50-70% less in Tel Aviv.”

However, he is already seeing the emergence of new champions, thanks to the power of pharmaceutical groups and Swiss banks. He explains: “Initially, everyone wanted to revolutionize banking from scratch, imitating financial services. Now, start-ups are looking to offer solutions for banks. We are more into “techs for fin” than “fintech”. That’s why you have to be in Switzerland.”

A difference of half a billion francs?

Despite the financial power of the Swiss groups, the idea of ​​creating a “fund of funds” worth half a billion francs continues to gain ground. Morally supported by the Confederacy (for now), it would aim to fill funding gaps for the growth of start-ups and allow it to attract institutions unable to make their money grow at current rates.

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Certain voices (in particular that of the Swiss Bankers Association) are also raised to ask for a modification of the legal framework that limits pension funds’ investments in alternatives to 15%: hedge funds, commodities and private capitalincluding venture capital.

The “false problem” of forecasting

A limit that did not prevent the Nest pension fund (20,000 policyholders) from widely publicizing its 2.5 million francs invested in six projects, with the aim of increasing this amount to 7 million. A sum that must not represent more than 0.5% of the total portfolio, specifies the foundation.

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“The market reality is that the proportion invested in venture capital is very low,” said Pascal Frei, a partner at investment consultancy PPCmetrics. “The 15% issue is not a problem. Pension funds can already deviate from this limit, provided they justify it. But I’m not sure that this risky strategy matches the risk tolerance of many credit unions, which is quite limited.

He’s not the only one expressing reservations. Daniel Roditi also does not view this potential influx of money with favor. “What will likely happen is that there will be inflation in the value of the boxes. In the global ecosystem where fundraising takes place, this can lead to totally unrealistic expectations for future investment rounds. And no one will be willing to pay for the previous investor’s stupidity. We need smarter money.” In other words, everyone has their own job.

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