Bloom And Grow - Swiss Venture Capital Report 2023

‘The investor of today does not benefit from yesterday’s growth.’

Warren Buffett, ‘The sage of Omaha’

Legendary investor Warren Buffett will doubtless be scratching his head over the resilience and defiance of the Swiss Venture Capital markets, where technology-based start-ups raised record amounts of capital in 2022 despite the harsh trading environment. Total funding increased 30% to almost CHF 4bn, compared to 2021, while the number of funding rounds grew 8% to a total of 383, according to the latest ‘Swiss Venture Capital Report’1 published by the investor association SECA, in cooperation with startup.ch.

Source: Swiss Venture Capital Report 2023

These results are all the more remarkable given that a backdrop characterized by the war in Ukraine, the associated disruption to global supply chains, the energy crisis, sharp increases in inflation and the aggressive tightening of monetary policy combined to create an austere environment for ambitious young technology companies to thrive.

Furthermore, the impressive growth figures are not a factor of investors temporarily rotating out of volatile public equities into the relatively calmer waters of the private-markets universe – as the table below clearly illustrates, this was the 10th successive year of strong growth in terms of both the amount of capital raised and the number of funding rounds. Interestingly, invested capital has almost doubled, since 2020, more than trebled in the last five years and grown almost tenfold over the last decade.

Figures In Detail – Technology-based Start-ups

Source: Swiss Venture Capital Report 2023

And the good news is not confined to start-ups. No fewer than 50 young Swiss tech companies were acquired by larger industry competitors wishing to leverage their expertise in cutting-edge technology or in identifying niche market opportunities. According to the Swiss Venture Capital Report1, the number of VC enterprises finding new owners (’successful exits’) fluctuated between 20 and 30 in the second decade of the century. Consequently, seeing this number leap to 50 in 2022, is a testament to the huge value creation achieved by fledgling companies.

The successful exits witnessed over the last two years have also contributed to a significant increase in VC fund launches. The report finds that no fewer than 55 VC funds were in the fundraising phase at the end of 2022, with the majority of providers targeting an investment volume of more than CHF 100 million.

Scratching beneath the surface

Apart from a fascinating ‘big picture’ overview, the report also includes some interesting findings at the sector and regional levels:

• The 'Cleantech' segment saw the highest rate of growth (+291%), with two constituent companies raising a total in excess of CHF 50mn

• The information and communication technologies (ICT)/Fintech sector surpassed CHF 2bn for the first time

• The popularity of ICT/Fintech helped Zurich maintain its position as the top regional centre, attracting 53% of total Swiss start-up investment

• Zug (+21%) saw the highest growth rate

• Swiss investors were involved in 10 of the top 20 funding rounds, demonstrating resilience and appetite for VC

The Buffett Enigma

The ‘Sage of Omaha’ – the most famous disciple of the Benjamin Graham school of value investing – would probably describe the continuing appetite for venture investing as irrational. As we have seen, the VC industry in Switzerland has been growing rapidly over the last 10 years, and the continuation of this trend could potentially be attributed to new investors’ fear of missing out.

However, the unprecedented conditions we have witnessed since the global financial crisis, characterized by the extraordinarily cheap cost of capital and central bank asset purchases, have kept many publicly-listed companies afloat, which would otherwise have perished. Consequently, investors are increasingly turning to private markets where there is the realistic possibility of harnessing significant value creation over the medium term.

The fledgling companies of today with the potential to blossom and flourish and bloom and grow are highly innovative and capable of developing cutting-edge technology and identifying niche market opportunities. It is clear from the findings of the Swiss Venture Capital Report1 that this argument resonates very strongly with local investors, which is also true of the broader investment community. According to Preqin, a leading Private Equity data provider, demand for private capital, in general, continues to grow. Forecasts indicate that global alternatives AuM will surpass $23.3tn by 2027, up from $13.7tn at the end of 2021.

1 SECA -Swiss Venture Capital Report 2023

https://www.startupticker.ch/assets/files/attachments/VCReport_2023_def.pdf (includes Stableton portrait on page 17)