With over 1.7 BMCHF invested in 124 startups, five financing rounds of above 100 MCHF and 6 IPOs in the first half of 2021, the Swiss startup ecosystem strives for new heights. Next to the entrepreneurial scene in Switzerland that has been maturing over the last two decades, a subgroup of investors gains more and more importance in Switzerland, namely Corporate Venture Capitalists (“CVC”). The increasing number of companies that have developed these corporate venture capital vehicles in the last few years clearly indicates that corporations want to more actively engage with the startup ecosystem. The survey from Institute for Financial Services Zug (IFZ) at Lucerne University of Applied Sciences and Arts and startupticker.ch in their latest Swiss Venture Capital report sheds light on this emerging investor-group in Switzerland for the first time.
The survey indicates a very heterogeneous CVC landscape with varying investment strategies, organisational setups, and goals. Whereas more than 90% of CVCs aim at investing during a Series A round, investments at earlier stages like pre-seed and seed are also popular. This proportion seems surprisingly high, considering potential occurrence of pivots and likely larger cultural differences between the startups and corporates. When it comes to organisation setup, there seems to be a prevailing model emerging. Most younger CVCs have dedicated professionals working in a corporate venture team with different levels of autonomy. This trend to more professionalism has been indicated by other CVC reports as well, but was never quantified, especially for Switzerland, before. In regards to how value creation is measured CVCs have varying perceptions. Despite being corporate backed, for only two thirds are strategic goals very important when it comes to making an investment decision. These strategic goals entail access to new technology, knowledge gains or product development. However, this does not imply that every investment by a CVC acts as a pre-M&A transaction; only around 50% of them see themselves as a long-term partner for the startups.
Increase in CVC financing rounds on the horizon
If one only looks at the current numbers, proportions are still modest. Despite investing regularly, the majority of CVCs invest in only one or two startups each year. However, three quarters of CVCs have only been active for less than five years and are just testing the waters. Portfolio construction takes time. Unfortunately, the report does not touch upon the decision making process of CVCs. In my opinion the composition of the investment committee as well as the investment team’s access to these stakeholders is key for well founded, swift decision making.
Looking at older, more mature CVCs may give a good indication on where CVCs in Switzerland are heading. Those older CVCs with more than 20 companies in their portfolio and an investment volume of more than CHF 100 million over the past five years are among the most active Swiss investors, financial and corporate alike. With more and more corporations gaining experiences with venture capital, one can be very optimistic that the proportion of CVC money and financing rounds with CVC will heavily increase until 2025.
What does that mean for Startups?
It becomes visible that the CVC landscape is broader than it initially may seem. Thus for startups seeking funding, investor due diligence is even more important when entering into talks with CVCs. Founders need to make sure that their goals and the objectives are aligned with the CVC. In turn CVCs are doing the same.
Sparrow Ventures as part of the Swiss CVC ecosystem
As an independent subsidiary of the Migros Group, Sparrow Ventures is on a mission to strategically invest capital in startups that fit into the Migros ecosystem. Consequently, the primary focus lies on consumer-facing business models ((B2)B2C, D2C and C2C) with a strong presence in Switzerland. However, at Sparrow Ventures we do not see ourselves just as means of financing, because we act for the startups in our portfolio as a strong partner with a long-term view. In order to be able to add this value, we are ideally an active member on the board of directors, providing strategic advice, establishing connections and exploring potential synergies within the Migros Group. In particular, the latter is a unique opportunity we bring to the table from our end, as we are in the position to open doors to Migros’ fast expertise in various fields, such as infrastructure, network and go2market strategy.
The setup of Sparrow Ventures as an independent legal entity in combination with an autonomous operating investment team that works strategically aligned with the parent company, provides startups in the portfolio with freedom to operate and to stay independent. Here we, the investment team, act as the link between the startup and the Migros ecosystem, which allows the startups to remain fast moving. In addition, most of us in the investment team have been entrepreneurs ourselves. As such:
“We know the startup’s fears, challenges and dreams and are acting as a long-term partner and as an ambassador for the startups in our portfolio. Meaning, when we invest, we are in this together.”
This is especially important, when times get tough or the startup experiences turbulence. From our end: We are in this together and are here to help our portfolio to stay on track and to grow.
In general when startups are considering taking a CVC on board, they need to make sure that the CVC has top level sponsorship to access the promised benefits from the top down. At Sparrow Ventures we are in a great position and excited to have exactly that trust and backing from our parent company. This backing can certainly amplify the process of opening doors and access to key stakeholders relevant to support the startup on their way to achieve their vision. It is still up to the startup team to go through the door, talk to the people and convince them of their product. However the chances for the startup could not be better.
If you think we could be the right CVC for you, get in touch. We are looking forward to hearing from you. > Contact us.
This article was written by Tobias who is a Senior Investment Manager in our team.