Financing your Start-Up in Switzerland Seminar The Practice of Entrepreneurship Fall Semester 2009, Zurich University Jan Fülscher www.jan.fuelscher.ch
Overview Introduction Organisations and Instruments to Finance your Start-up Random Thoughts On Financing Your Company
Introduction
Seed Start-up Phases, Investment Risk, Capital Need Risk of loosing the investment ( typical case) Capital requirements (typically) Growth Expansion Consolidation
Investing in Start-Up Companies: Entrepreneur s vs. Investor s View Probability Entrepreneur s view: Success = company survives Bankruptcy 10% ok Business 80% Star 10% Profitability Probability Investor s view: Success = investor gets the investment back with a multiple (trade sale,...) Bankruptcy 10% ok Business 80% Star 10% Profitability
Investing In Start-up Companies: The Portfolio ~10% of the companies are extremely successful o 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 market o Especially early-stage portfolios
The (Active) Start-up Community In Switzerland C B A 50~100 100~200 >500 A 50 to 100 people: 2+ companies started on their own 5+ 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
Organisations and Instruments to Finance your Start-up
Most Important Sources Of Funding (1) Government / government supported organisations o 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 interests o Business Angels o Private Equity o Venture Capital Funds o Banks and other commercial loans o Business Partners Match makers o 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 2 nd, 3 rd 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 2 nd / 3 rd 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 funds o 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 presence o Can be positive or negative Broader visibility with experts o Mostly positive Money o generally, no strings attached => better than investors money Free-of-charge services o Coaching, training, offices,... o Beware of the decoy! Entry tickets to other events o 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 awards o Same jury members in all competitions Joining competitions and constantly winning: o o o o Can pay the salaries Gives media presence => Easier access to investors, experts, customers,... Needs lots of time (one 100% job if you re serious about it) 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... October o 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 December o 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 welfare o 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 500 000 o 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 banks o 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 Types 1. 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 company o 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 o Through business angel networks (=> match makers ) Through your personal network (especially industry-related) Work with Business Angels if: o o they understand your industry 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 / families o 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 regulated o 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. Freie Gemeinschaftsbank 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 you o 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 risks o 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.ch o 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/matchingplattform/login/ www.businessbrokers.ch o 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.ch o 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 first o 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 again o Angry investors are bad news: Small community... Fundraising needs a lot of work o 10% to 50% depending on your schedule, money required, business plan,... o Understand the community and the players Start with money that comes without obligations o Foundations, Competitions, Awards o Publicity for reasonable cost Work with investors that have a certain investment pressure o 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 I T t 1 CF (1 i) t 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 t L (1 i) T
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: Page 1: Page 2: Page 3: Page 4: Page 5: Page 6: Page 7: Page 8: Page 9: Page 10: Q&A: More: Event, logo, date, speaker, contact Info The market problem Our solution Why it works and how it works The market (size, potential, segments) Competitors and our strategies Business model and value chain Next steps Financials (revenue, profit, cash flow, # employees) Management team, board (key figures + photos) Offer to investors Links to additional pages Well-structured additional pages about specific subjects (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...