Switzerland is the most innovative economy in the world, according to the Global Innovation Index, and a vibrant start-up ecosystem drives that innovation forward. Capital is a key ingredient in supporting the development of these young companies. But how do they finance their businesses? Tanya König of finance.swiss sat down with Lukas Reinhardt, head of Growth Advisory at UBS, to find out.
Why does Switzerland have such a vibrant start-up ecosystem?
It has to do with the innovation that happens here. Switzerland was voted the most innovative country in the Global Innovation Index for the 13th consecutive year. So that’s definitely an achievement. So why does that happen? It has to do with our educational system and with the amount of money that is actually put to work in R&D. Switzerland has the highest spending in R&D per capita worldwide, and our technical universities—particularly ETH in Zurich and the EPF in Lausanne—are world-class institutions that create innovation in a steady flow; about 50–60 spin-offs every year come out of only those two universities and many more out of the other universities. So all this innovation is looking for financing, and that’s one key part why the start-up
ecosystem is so vibrant.
It sounds quite exceptional. How does it compare to other regions of the world?
As mentioned, Switzerland is very strong in creating these innovations, so if you measure that by patents that are created, for example, there we are world class. We’re also really leading within Europe. When you compare how much venture capital is invested in Switzerland, we are on a good average compared to other European countries at about 0.1 percent of the GDP every year. If you look at other countries like Israel or the U.S., for example, that metric is three to four times higher, though. So having said that, there’s definitely still room for improvement, but we are on a very good level.
So the ideas are here and the money then just comes from outside?
Yes, for a large part, it comes from outside today. But there is money here domestically, as we know, so I think it’s about the structures and how to funnel that money into the right direction.
Venture capital funds are at the forefront of financing early stage start-up companies. What does the market structure look like in that space?
On average, I would say 20–25 percent of the venture capital is actually coming from Swiss funds here. About one-third comes from the U.S. This has to do with the fact that the large U.S. venture capital funds usually step in at a later stage, where larger volumes are deployed. So that, of course, influences that statistic. And the other roughly 50 percent then comes out of the U.K., France, and other developed economies mainly.
And what do they look for?
They’re looking for our world-class innovation, for deep tech companies particularly. Because it’s well-known by now, also worldwide, that Switzerland is leading, and venture capital funds noticed that, in the past couple of years, more and more capital actually came in from the outside to Switzerland to finance that.
Banks step in a bit later in the life cycle of a start-up of a young company. When and why?
We would usually step in at a later stage, so in the growth stage of a company—growth stage defined by revenue generation, even better visibility toward break-even. This is where banks feel more comfortable in terms of analyzing a business case. Early stage start-ups are very difficult to analyze. That’s why venture capital funds that invest in the seed stage or early stage of a company usually have very deep expertise in a certain technology. Because what you do at that stage is really to invest in a team, in an idea, or a technology. So this is not particularly where banks have the necessary capabilities.
But as a bank, do you already look out for future opportunities like looking at early stage start-ups and think about financing them later on?
Definitely. So we usually engage very early on with the companies, even if we cannot provide financing yet. Because, of course, we want to see how those companies develop over time and see how they commercialize and how they scale up in order to actually be able to assess a certain business model and a company.
What other initiatives are there in Switzerland that are worth mentioning that nurture that ecosystem?
We have a couple of initiatives here in Switzerland. One initiative targeted at R&D spending is the technology fund. This is a scheme set up by the federal government to support clean-tech innovation. How it actually works is you get a guarantee from the federal government to finance a company, the company’s R&D, so banks, of course, then lend to those companies based on those guarantees. Other initiatives that are well-known are the Swiss Economic Forum. Within the Swiss Economic Forum there’s a program called SEF.Growth that is more targeted at the growth stage of companies. And there’s many more, like the Swiss Entrepreneurs Fund, for example, that was set-up a couple years ago and has already invested 250 million CHF into the Swiss start-up environment.
Switzerland is a leading offshore wealth manager. What are the advantages when it comes to venture capital investments?
It definitely helps, right. We have a lot of private investors investing in start-ups here in Switzerland. A statistic from 2021 estimated that around 60 percent of the rounds are also invested by private investors directly, which is definitely above average internationally. So that has to do with the fact that there’s a lot of private wealth here in this country. We have a lot of family offices located here that do invest in venture capital, so that definitely helps to nurture the ecosystem.