Financing your Start-Up in Switzerland

Seminar “The Practice of Entrepreneurship”Fall Semester 2009, Zurich University

Jan Fülscherwww.jan.fuelscher.ch

Overview

• Introduction

• Organisations and Instruments

to Finance your Start-up

• Random Thoughts On Financing Your Company

Introduction

Phases, Investment Risk, Capital Need

• Risk of loosing the investment (“typical” case)

• Capital requirements (typically)

See

d

Sta

rt-u

p

GrowthExpansion

Consolidation

Investing in Start-Up Companies:

Entrepreneur‟s vs. Investor‟s View

Profitability

Probability

Profitability

Probability

Bank-

ruptcy

10%

Bank-

ruptcy

10%

Star

10%

Star

10%

“ok”

Business

80%

“ok”

Business

80%

Entrepreneur‟s view:

Success = company

survives

Investor‟s view:

Success = investor

gets the investment

back with a multiple

(trade sale, ...)

Investing In Start-up Companies:

The Portfolio

• ~10% of the companies are extremely successfulo Can be sold or brought to the stock exchange

• The selling price of those that can be sold has to cover the losses of all other projects + interest

• => In average, selling price must be > 10 x investment

• Target selling price (professional investors): 10 – 30 x the investment o Depends on the percentage of companies that can be sold

successfully

• In practice, the performance of many start-up portfolios is below the average of the capital marketo Especially early-stage portfolios

The (Active) Start-up Community

In Switzerland

A 50 to 100 people: 2+ companies started on their own5+ investments, 1+ bankruptcies, 5+ years in the industry

B 100 to 200 people: 1+ start-ups on their own 2+ investments, 0+ bankruptcies, 2+ years in the industry

C 500+ people: 0+ start-ups on their own 0+ investments, 0+ bankruptcies, 0+ years in the industry interested in joining the community

50~100

100~200

>500

A

B

C

Organisations and Instruments

to Finance your Start-up

Most Important Sources Of Funding (1)

• Government / government supported organisationso Swiss National Science Foundation: Research Funding

o CTI: Know-How, Training, Research Funding, Matchmaking

o Credit Insurance & Surety Associations: Guarantees for commercial loans

• Not-for-profit money: o Your own money

o “FFF” / “Love Money”

o Venture 20xx (ETH, McKinsey, CTI): Know-How, training, presentation opportunities

o VentureKick, De Vigier, Pionier, Swiss Equity Fair, Heuberger, Venture 20xx, …: Competitions + Awards

o Foundations (Gebert Rüf, Avina, Volkswirtschafts-Stiftung, …): grants, allowances

o Microcredits

Most Important Sources Of Funding (2)

• Cantonal banks: o For-profit-investments and to support the economy of the canton

• Groups with mostly financial interestso Business Angels

o Private Equity

o Venture Capital Funds

o Banks and other commercial loans

o Business Partners

• Match makerso CTI Invest

o Business Angel Clubs

o Consultants, M&A companies

o Match making-platforms

Government And

Government Supported Organisations

Swiss National Science Foundation

(www.snf.ch)

• Focus on research projects (before seed)

o “The Swiss National Science Foundation (SNSF) is the most

important Swiss agency promoting scientific research.”

“It supports […] all disciplines, from philosophy and biology to

the nanosciences and medicine.”

• Total budget: CHF 600 Mio p.a.

• Many programs and directions

• Direct support of research projects

The Innovation Promotion

Agency CTI: Introduction

• Focus on applied research

• Seed phase and before

o “CTI is the Confederation‟s innovation promotion agency.”

o “[…] knowledge and technology transfer between companies and universities by bringing them together as partners on applied research and development projects.“

o “CTI also provides assistance to start-up companies.”

• Total budget: CHF 100 Mio p.a.

• No direct investments into startups

• Programmes:

o Research and Development Project Promotion

o Innovation Management and KTT (Knowledge and Technology Transfer)

o Start-up Promotion and Entrepreneurship

CTI: R&D Project

Promotion

• Incentives to increase co-operation between businesses and academia:o For joint projects, CTI pays for the academia part of the project

(but at most 50% of the running cost)

• Programmes:o CTI Micro- and Nanotechnologies

o CTI Life Sciences

o CTI Enabling Sciences • Business Management, Finance, Public Management, Tourism, Urban

Planning, Design, Arts, Architecture, Macroeconomics, Social Sciences, Public Health, Information and Communication Technologies, Integrated Production, Logistics)

o CTI Engineering Sciences

o Innovation cheque for SMBs • Incentives for SMBs to innovate

o R&D consortia

CTI: Innovation Management and KTT

(Knowledge and Technology Transfer)

• R&D Consortia:

o Financial support of science-business-consortia that create

new knowledge

• Knowledge and Technology Transfer Consortia:

o Financial support of organisations that help transferring

knowledge from science to business

CTI: Start-up Promotion

and Entrepreneurship (1)

• CTI Entrepreneurship (www.venturelab.ch)o Seed phase and before

o Venture Apéros: Know-how for entrepreneurs

o Venture Ideas: Entrepreneurs tell their stories

o Venture Challenge: 1-semester course to develop your business idea

o Venture Plan (free of charge, if qualified): • 5-day-workshop, result: business plan & pitch

• 1st investor presentation (feedback from A+B people)

o Venture Training (free of charge, if qualified): • 5-day-workshop, result: refined marketing strategy, pitch

• 2nd investor presentation (first contact with real money, A+B people)

o Venture Leaders (free of charge, if qualified):• 10-day trip to Boston; trainings, meetings with VCs, ...

o VentureLab operated by Institut für Jungunternehmen, IFJ

CTI: Start-up Promotion

and Entrepreneurship (2)

• CTI Start-Up: Coaching for startup companies

o Seed phase, start-up phase

o Up to CHF 30„000 worth of consulting

o 40 coaches (A+B people)

o Result (if qualified): CTI Startup Label (~ 20 startups per year),

easier access to financing

• CTI Project Support

• CTI Invest => cf. matchmakers

Credit Insurance & Surety Associations

(CISAs)

• Entrepreneurs often do not qualify for a bank loan

• Start-up phase

• CISAs: self-help organisations that provide securities to the bank, for loans up to CHF 500‟000

• CISAs in Switzerland are backed by government

o Carries 2/3rds of eventual losses of the CISA, carries some of the management cost

• Customers: Mostly commercial shops, craftsmen, ...

• Total debts in CISAs: CHF 150 Mio (2008)

o Total commercial credits: 210 Billion CHF (w/o mortgages)

o Some CISAs are closing down because of lack of customers

• Regional organisations, except SAFFA (women only)

Not-for-Profit

Not-for-Profit

• Your own money

• “FFF” / “Love Money”

• Venture 20xx (ETH, McKinsey, CTI)

• Competitions / Awards

• Foundations

• Micro credits

Your Own Money

• Most important source to set up a new company

• Seed phase, start-up phase

• Sources:

o Your personal savings

o 2nd, 3rd pillar savings (use with caution!)

o Free-of-charge work

o Loans on your personal assets

• Cheap, no securities required, no strings attached

• First and best source of funds, unless you need to

use your 2nd / 3rd pillar savings

“FFF” / “Love Money”

• “FFF” = “Family, Friends, and Fools”

• “Love Money” = money from people who like you

• Start-up phase

• Sources:o Personal loan to you

o Loan to your company

o Share capital

o Inheritance or anticipatory succession

o Guarantee / security on a loan

• Excellent source of fundso Relatively easy to access, if you have wealthy friends / family

o Use with great care

Venture 20xx (www.venture.ch)

• Training / Coaching: Seminars, workshops, and coaching sessions

• Seed and start-up phases

• Networking Platform: Apéros

• Competitions:o Business Ideas (Oct – Jan): CHF 2‟500 for top 10 Ideas

o Business Plans (Jan – May): total ≥ CHF 125‟000, First price CHF 60‟000

o Excellent media presence for the winners

• Initiated and supported by ETH, CTI, McKinsey, and 17 Swiss companies

• Open to anyone who lives in CH, FL and > 18yrs old, company less than one year old

• Participating teams: ~100

• Experts: ~80 jury (A, B, C), ~200 coaches (A, B, C)o Many CTI coaches and well-known business angels involved as jury, coaches

• Go there!

Awards and Competitions (AC)

• Feedback from experts (A, B, C)

• Media presenceo Can be positive or negative

• Broader visibility with expertso Mostly positive

• Money o generally, “no strings attached” =>

better than investors‟ money

• Free-of-charge serviceso Coaching, training, offices, ...

o Beware of the decoy!

• Entry tickets to other eventso Venture Kick Stages 1 => 2 => 3

o Zurich Equity Fair / Aargauer Equity Fair => Swiss Equity Fair

• Normally, “the winner takes it all”: A few startups grab all the awardso Same jury members in all

competitions

• Joining competitions and constantly winning:o Can pay the salaries

o Gives media presence => Easier access to investors, experts, customers, ...

o Needs lots of time (one 100% job if you‟re serious about it)

o Can be bad for your reputation (“don‟t they have better things to do?”)

• Joining competitions and constantly losing:o Waste of time, bad for your

reputation

AC: VentureKick

• 3 rounds:

o CHF 10‟000 (academia project, company not set up yet)

• 8 candidates per month, every other gets the price money and qualify for

the next round

o CHF 20‟000 (business case prepared)

• 4 candidates per month, approximately every other gets the price money

and qualifies for the next round

o CHF 100‟000 (ready to enter the market)

• ~ 2 candidates per month, few get the price money

• Foundations involved: Gebert Rüf, Ernst Göhner, OPO

• 100 jury members (A, B, C)

• Great starting point if you have an academia project

AC: De Vigier

• Foundation in Solothurn

• Start-up phase

• 5 winners per year, each gets CHF 100‟000

• Huge formal event, media presence, ...

(A, B, C people)

• “cooperation with CTI”

• Good place if you don„t mind the media

o See and be seen

AC: ZKB Pioneer Award Technopark

• Award donated by Zürcher Kantonalbank

o Start-up phase

o CHF 98'696.04

• For academia projects and businesses

• Award assigned in April, huge event in Technopark

Zürich

• Good place if you don„t mind the media

o See and be seen

AC: Swiss Equity Fair

• Regional contests with local awards in August ... Octobero Start-up phase

o Award, no financial benefits

o Managed by Swiss Equity Magazine and local parties• AG: Aargauer Kantonalbank + Technopark Aargau

• ZH: StartZentrum Zürich + J. Fülscher

• Main contest beginning of Decembero Award, no financial benefits

o Huge investor presence (because of combination with other private equity events)

o Variable locations

o Managed by Swiss Equity Magazine + experts of ZKB, Technopark, CSEM, CTI, Wenger & Vieli, ...

• Good place if you don„t mind the media

• High exposure to medium-term investors

AC: More Awards

• National:o Swiss Economic Award (Swiss Economic Forum):

• 3 awards, each CHF 25‟000

• Huge media presence, professional movie

• “der bedeutendste Jungunternehmerpreis der Schweiz” (“the most important award in Switzerland”)

o Some more

• Regional: o Heuberger (3 awards, each CHF 150‟000, Winterthur only),

o Basel, Thun, ...

• Industry-related:o ICT, Sports, Media, Medtech, ...

• Many, many more

• Comprehensive List: www.gruenden.ch Zusatzinformationen > Wettbewerbe

Foundations

• Industry on its own

• About 11‟000 foundations for public welfareo Little regulations, no directory

• Total assets: About 30 Billion CHF

• Donations total: About 1 Billion CHF per year

• Donations for startups / innovation projects: Unknown

• Three examples (not representative)o Gebert Rüf Foundation (Geberit): CHF 8 – 10 Mio per year, currently 84

projects

o Avina Foundation (Stefan Schmidheiny): CHF 14 Mio per year (2008), 66% social projects, currently 203 projects

o Volkswirtschafts-Stiftung: Interest-less loan, max. CHF 300‟000 (in combination with a CTI project)

• Finding the right foundation needs time

• Typically seed and start-up money

• Excellent source of funds

Micro Credits

• Loans for people who want to start a new business but

cannot offer securities to the bank

• Start-up money

• Foundation “Go! Ziel selbstständig” in Zürich

o Financing by Zürcher Kantonalbank

o Credit risk insurance by the foundation

o Maximum CHF 40‟000, “market-based” interest rates

• If you need a smaller loan and have no other

sources

Cantonal Banks

For-profit-investments

Support the economy of the canton

Trend Setter:

Zürcher Kantonalbank

• “Pioneer” project

• Start-up money

• 20+ investments per year, each up to CHF 500‟000o Criteria: Innovation, business model, management

o Geographical focus: “Zurich economic area”

• Current portfolio: 120+ investments

• Total investments of CHF 10 Mio per year, o One of the biggest investors in start-up companies in Switzerland

• Other cantonal bankso Same idea (economic pressure between cantons)

o Various implementation models

o AG, LU, SG, SZ, ...

• Excellent opportunity if you match their criteria

Groups With Mostly Financial Interests

Groups With Mostly Financial Interests

• Business Angels

• Private Equity

• Venture Capital Funds

• Banks and Commercial Loans

• Business Partners

Business Angels

• Types1. Entrepreneurs who have sold

their company (A)

2. Wealthy families who invest part of the wealth in start-ups (B, C)

3. Wealthy line managers looking for a challenge (C)

• Invest time, money to support the companyo Start-up, expansion money

• Typical investments: o CHF 25‟000 to CHF 250‟000

o Minority shareholders

o Wants to sell after 3 to 5 years

o Invested in 5 to 20 companies

• Most business angels do not want to spend too much time on one project - but some do

• Finding Business Angels: o Through business angel networks

(=> “match makers”)

o Through your personal network (especially industry-related)

• Work with Business Angels if:o they understand your industry

o can and want to support you

• Beware of Business Devils

Private Equity

• Money from wealthy and extremly wealthy individuals/ families

• Start-up, expansion money

• Directly or through their “family office”

• Mostly well-known people / familieso Receive extremely many offers

o Generally not interested in start-up financing

o Very difficult to get funds

• Typical investments:o CHF 100‟000 to CHF 1‟000‟000

o Portfolio of 5 to 20 investments

o Not interested in shares, but takes them

• Can sometimes be unreliable: o Medium to low interest in your project

o Main interest: management of portfolio, network, ...

• Lists: SECA (Swiss Private Equity Association), www.seca.ch

Venture Capital Funds

• Organisations that (usually) invest in companies in expansion stage (sometimes start-up stage)

• Investments normally starting at CHF 1 Mio

o Time, effort required to assess the project (CHF 30‟000 +) must be in reasonable relation to potential profit

• Examples:

o New Value => focus on renewable energy

o Red Alpine => also start-up money

o Novartis venture fund => total investment USD 15-20 mio per project, initial investments starting at USD 100‟000, life science

o Many, many more...

• Understand the goals, focus of the fund

• Ask them only if you match their goals

Banks and Commercial Loans

• Banking business is nowadays heavily regulatedo No room for negotiation for your account manager

o For consolidation phase

o Generally, finding money with a bank is easy if the risks are very low

o Exceptions: • start-up funds of some cantonal banks

• Loans / investments of banks with a specific focus, e.g. FreieGemeinschaftsbank Basel: Slight focus on people-centric projects (anthroposophic background)

o Difficult to find financing from a bank if you can‟t offer securities• Banks will ask you to back their investment through personal securities

=> don‟t

• Ask your bank but don‟t be disappointed if they can‟t help

• Avoid loans where personal backing is required

Business Partners

• Some of your customers or suppliers might be interested in helping youo Diversification of their business

o Access to interesting technology

• Start-up, expansion phases

• Ask for rebates, pre-payments, delayed payments, strategic research co-operations, ...

• Talk to R&D person, CTO or CEO

• Excellent financing opportunity if you understand the riskso Always work with a lawyer to check the fine print

Match Makers

Match Makers

• Events (open to the public or closed user groups):

o All public awards – the bigger, the better

o CTI Invest

o Business Angel Clubs

• Web-based:

o Match making electronic platforms

• Individual match-making:

o M&A Consultants

o M&A companies

CTI Invest

• www.cti-invest.ch

• Formally independent NPO, subsidized by CTI

• Various networking events

• Quarterly matchmaking events with investors

(A, B, C people)

o 5-10 startup presentations per event

o About 50% of the companies that have presented at CTI Invest

will eventually get financing

• Investment volume ~ 10-20 Mio CHF p.a. (???)

Business Angel Clubs (1)

• There‟s a number of clubs in Switzerland where

Business Angels (and would-be‟s) meet to check out

projects

o Start-up and expansion phase

o A, B, C people

• The club board members and management are

normally very well networked

• Investments in “down-to-earth” projects preferred

• Most – but not all – are NPOs

o Avoid mixing for-profit and not-for-profit organisations in

the same financing round

Business Angel Clubs (2)

• Larger organisations:o Business Angels Switzerland => 20 events per year, 40-50

presentations, total investment volume n‟000‟000 CHF

o Start Angels => ~ 5 events per year, 20-30 presentations, total investment volume n‟000‟000 CHF

o BioValley Business Angel Club => Focus on life science projects

o B-to-V => for-profit, focus on Germany

• Many smaller clubs

• Absolutely talk to them o Learn how they‟re set up and financed => success fees?

o Most A people are attached to one or more clubs

Match-Making Web-Based Platforms

• www.startfinance.cho Not-for-profit, free of charge (for

the time being)

o For startup projects in Switzerland and investors in Switzerland

o Selected projects, selected investors

o New (Spring 2009), little traffic, 60+ projects, 130+ investors

o German only (for the time being)

o www.startzentrum.ch/de/ startfinance/matching-plattform/login/

• www.businessbrokers.cho For selling your business

o For-profit, CHF n00 per month for an ad

o Many ads, many visitors

o Add-on to M&A business

o Reported to be large (n‟000 visits per month)

• www.sb24.cho For selling your business

o For-profit, CHF n0 per month for an ad

o Probably smaller platform

• More?

M&A Consultants

• Individuals who know the market very well and understand where to find investors

• Normally, they are quite selective o depending on the fee structure

• Fee structure:o Payment in advance: Don‟t

o Payment per hour: Don‟t, unless you need to work with them

o Payment based on success: Fees in the range of 3% ...5% (... 10%) of the transaction volume

• Sometimes related to an incubator / bank / VC

• May help you with your documentation (“dressing the bride”)

• Their network can be of great help, but try other sources firsto Try to negotiate transaction-based fee

o No exclusive mandate

M&A Companies

• Consultants who live off helping finding and selling

companies

o Very often, excellent network

o Most companies work in specific industries

• Will work extensively with you to make you more

attractive to the buyers

• Hourly and transaction-based fee

o Often require a certain minimum transaction value, i.e. CHF 1

Mio

• For expansion and exits

Random Thoughts

On Financing Your Company

Random Thoughts:

You Get What You Pay For

• There‟s no free lunch!

o If you accept money from somebody else, you usually have to give something to them

o Is the upside potential of taking the money worth the downside risk of loosing it?

o Do you really need money from outsiders?

o What happens if:

• You aren‟t successful at all (10% probability)?

• You can live (nicely) with your business, but it‟s not a huge success? (80% probability)?

• Media presence can be very useful

o They‟re interested in the story, not in you

o You might not like the story they put together

o You can‟t manipulate the media

Random Thoughts:

Understand Your Investors

• Work (with) the investors – you might need them againo Angry investors are bad news: Small community...

• Fundraising needs a lot of worko 10% to 50% depending on your schedule, money required, business plan, ...

o Understand the community and the players

• Start with money that comes without obligationso Foundations, Competitions, Awards

o Publicity for reasonable cost

• Work with investors that have a certain investment pressureo You might be lucky...

• Reasons why an investor might decide for you:o Cool technology, high potential

o Good management team

o Board members who are good to know

o Good pitch

o Good business plan

Random Thoughts:

Valuation

• Dozens of methods to calculate the value of the company

• The only correct value is the actual transaction price

• Net present value (NPV):

• NPV = sum of the discounted future cash flows CF

• Future cash flows are estimations, discount the estimations to factor in the risk of errors

• Best indicator for the future: the past

• Budgets are wishful thinking – you‟re a new business, there‟s no experience

• NPV based on budgets is just a random figure

• Use a number of different methods

• Choose a result which is reasonable, comparable to similar projects o Use this as a starting point for the negotiations

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Random Thoughts:

How to Start

• Check out www.gruenden.ch

• Apply for VentureLab

• Make a business plan and have it verified

• Understand the implications and benefits of your business idea

• Develop an elevator pitch

o 10 seconds to explain your new business in general terms

o 10 seconds to explain the opportunities of your business to the person talking to you – customized version of the elevator pitch

• Develop a 10 minute pitch

o Used for investor presentations

o Know it letter-perfect

o Develop a show to go with the presentation

o “Seeing is believing” – demonstrate whatever you can

Random Thoughts:

The Pitch

• Page 0: Event, logo, date, speaker, contact Info

• Page 1: The market problem

• Page 2: Our solution

• Page 3: Why it works and how it works

• Page 4: The market (size, potential, segments)

• Page 5: Competitors and our strategies

• Page 6: Business model and value chain

• Page 7: Next steps

• Page 8: Financials (revenue, profit, cash flow, # employees)

• Page 9: Management team, board (key figures + photos)

• Page 10: Offer to investors

• Q&A: Links to additional pages

• More: Well-structured additional pages about specificsubjects (IP, market strategy, detailed financials, …)

Random Thoughts:

The Investor‟s View

• An average professional start-up investor... o Reads 50 – 100 business plans per year

o Sees 20 to 50 pitches per year

o Invests in 1 to 2 cases per year

• Selection criteria:o Knows the industry

o Can add value to the company through his/her network

o Fits into the portfolio

o Many negative criteria:

• Too expensive

• Don‟t like the team

• Difficult market, unsuitable market strategy

• ...

Random Thoughts:

The Information Problem

• Information problem: o Deciding whether a specific project would be a good investment requires a

lot of time and some money

o Investor: Too many candidates, not enough time => partly emotional decisions: • Cool technology, high potential

• Good management team

• Board members who are good to know

• Good pitch

• Good business plan

• Your job as a startup: help the investor come to a decision!o Be as honest and open as possible

o Never waste the investor‟s time

o Provide all information required promptly and accurately

o Get yourself a board and an advisory board with excellent reputation

o If you already have well-known investors on board, new candidates will be more interested in joining: • they‟ve made the analysis

• they are good to know

Random Thoughts:

Concluding Remarks

• If you don‟t need investors, avoid them. o It might not be worth the effort.

o Start acquiring money that comes without obligations.

• Don‟t waste the time of your investors:o They read your business plan in their spare time.

o They may have lots of experience in your industry – much more than you have.

o They‟re well networked, they talk to each other, they probably know each other.

o Be clear, open, honest. Never lie or play games – it will be found out.

• Work with the investors. o They want to become rich, but not at your cost (mostly, anyway).

o They want to help you – they might have been in the same situation as you were.

o Ask them for advice – they will probably like it and you actually might learn something...