In a list of the ten largest venture capital deals in Switzerland last year, six were university or industrial spinoff companies, according to a new study of Swiss innovation investment trends.

In a major swing away from putting their money into startups founded by "two guys in a garage" or startups based on "great ideas", venture capital investors are putting their money into privately owned Swiss firms with strong intellectual property portfolios, says a new study published by SwissVenture Update (link below) that tracked and analysed venture capital investment in innovative firms in 2001.

In a year that saw a total of SFr409 million raised by privately owned firms, the top ten snagged more than half of it, raising some SFr225 million. Six of the top ten were startups with valuable, patented technologies.

Typical of the high-tech trend is two year old, u-blox AG, a university spinoff that makes global positioning systems (GPS) on a chip. It raised SFr20 million in a first round in late summer 2001.

Another university spinoff, Gigatera raised SFr15.5 million in total last year. The Dietikon-based firm is developing optical networking equipment based on research in quantum physics at the Zurich campus of the Federal Technical University. University of Zurich spinoff, EsbaTech, a biotechnology startup raised SFr17 million.

Besides university spinoffs, investors particularly favored management teams whose products emerge from research at major pharmaceutical companies.

Typical of this type of firm is Roche spinoff, Basilea Pharma and Zeptosens, an emerging bio-analytics company founded by former Novartis employees in 1998.

Perspectix, AG of Zurich raised a significant amount of early stage capital too. It is a spinoff of Zurich-based graphic arts firm, Nose AG.

Cut the risk

Significantly, these six spinoffs are also the only early stage transactions in the top ten list. In other words, the only firms to attract funding in the startup phase were those with serious high tech assets.

The trend to invest in early stage companies with high-tech assets (patents, licenses and proprietary technologies) shows that venture capital investors have decidedly swung away from investing in "great ideas" and dotcom businesses, the trend for 1999 and much of 2000, towards investing only in innovative, high-tech businesses.

The research report published by Swiss Venture Update confirms what has been only anecdotal evidence until now.

Typically the private equity industry describes venture capital investments as either early stage or later stage. Early stage deals are those that invest in budding companies that may or may not yet have a prototype or product, relatively few employees, and even fewer customers.

Later stage investments go into growing, privately-owned firms that are generating income, but not necessarily profitable. It could be some form of expansion funding in exchange for equity or an equity-based loan. Later stage companies potentially could go public or offer significant returns to investors via profits or a trade sale in the short to medium term for investors.

Many of the Internet businesses that venture capitalists here put their money into in the late nineties were based on immature business models. Often they were copy cat companies, imitating dotcom startups in the US. When they went bust, as is often the case with small businesses, the investors had little or no assets to sell off.

With high-tech-type investments, if the young management teams fail to make a go of their high tech business, the investors can at least recoup some of their investment money by selling off the patents and other intellectual property.

A big deal, but not significant

Although the list of the top ten deals is dominated by an SFr82.6 million transaction raised by Digiplex, a Pan European web hosting and co-location firm, the report says the deal is not significant to the innovation economy in Switzerland.

The Digiplex investment is not an indication of trends, present or future, says the research. It is a company based in Switzerland does not have much interaction with the local economy. It operates from London.

Average deal size

To put the size of the venture capital transactions discussed here into perspective, it is worthwhile to compare the average deals size in the top ten versus the rest.

Excluding Digiplex's SFr82.6 million deal in the top ten, the average transaction size is about SFr16 million. The rest of the companies raised an average of SFr4.7 million each.

To sum up - of 49 companies to raise capital, ten of them took more than half of the money - some SFr225 million - leaving the other 39 companies to share the rest of the capital raised, some SFr189 million. The result is an average deal size for the "non-top 10 firms" of less than SFr5 million each.

Top ten largest venture capital investments in 2001:

1 Digiplex, Zürich, SFr82.6 million
2 u-blox, Zurich, SFr20 million
3 Basilea Pharma, Basel, SFr17 million
4 EsbaTech, Zurich, SFr17 million
5 Obtree Technologies Inc., Basel, SFr17 million
6 Gigatera ,Dietikon, SFr15.5 million
7 Perspectix, Zürich, SFr15 million
8 SIS Group AG, Bruegg, SFr15 million
9 Zeptosens, Basel SFr14.2 million
10 Team Brendel, Basel, SFr13.5 million

by Valerie Thompson

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