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Swiss VC investment defies slump - so far

Nanotechnology is becoming the new hotspot for investment (Polymer Science Group)

Venture capital investment statistics for the first nine months of this year show that innovative technology firms are still attracting capital in Switzerland.

Despite a stagnating economy, tech firms are on track to raise a similar amount to what was raised in 2001.

Privately-owned, innovative Swiss firms have raised €212 million in the first nine months of this year, according to Tornado Insider's On-line Deal Database. Industry experts say that the total numbers for 2002 are not dismal when compared to 2001, but are quick to point out that 2001 investing fell from a peak in 2000 and was more in line with investment in 1998/99.

The forecast for the fourth quarter, based on a Deloitte & Touche survey of Swiss investors, entitled Venture Capital Barometer, suggests the deal flow will be similar to previous quarters in 2002, which would bring the year end total to about the same amount as was invested last year.

According to a Swiss Venture Update report published earlier this year, €278 million was invested in 2001.

For the first two quarters VentureOne, a database that surveys venture investors, shows the same trend. (Figures for the third quarter have not yet been made public). The amount of venture capital investment in Switzerland in the first half of the year was €137 million. That is about the same as what the investment tracking firm recorded for the second half of 2001 at €133 million.

Biotech boom to bust?

The largest deals of the year in Switzerland took place in the first half of 2002, with Axovan and Cytos Biotechnology dominating the list. More than half of the total of Swiss funding this year, some €106.9 million, has gone to biotech companies, says Tim Weeks, senior research analyst at Tornado Insider.

The country's strong pharmaceutical sector and corporate venture activity by the likes of Novartis and Roche is a factor. "It's a sector in which Switzerland has traditionally excelled," Weeks added.

Biotech activity actually slowed in the third quarter. Major players, such as HBM Partners, have not made any new investments in the past quarter. "Prices are under immense pressure and quality companies are simply holding back with fund-raising," explains Andreas Wicki, CEO and member of the board of HBM Partners AG, Zurich. He adds that the quality of European deal flow [in the biotech sector] is down this year compared to last year.

The dominance of biotech deals somewhat masks a decline in other tech investments. "If you subtract the large biotech deals from the total, the amount available for other technologies has fallen since 2001," points out Massimo Lattmann, chairman of the Swiss Private Equity and Venture Capital Association, and founding partner of Zurich-based Venture Partners AG.

Mature companies attract

The largest amount of capital, €81 million, went to second rounds, showing that investors were more interested in helping mature firms to grow than funding earlier stage firms.

Venture investors here say that is easier to find co-investors for later rounds for existing portfolio companies. "With good companies, it is still possible to find second and third round investors," says Christof Wolfer of Aventic, a UBS private equity division, in Zurich.

But companies not yet at break-even, except for biotech, have a tough time finding new investors, added Lattmann.

First rounds attracted €57 million and only €6 million went to seed or early stage deals. Those that did receive seed funding were more than likely to be university spinoffs.

Sector activity: what's hot for the Swiss

Software is the second most popular sector, attracting some €41 million so far this year. "It was not expected that the software sector would be as strong as it is in Switzerland," says Weeks.

Investment activity in the second half of the year suggests a return of the private, high net worth individual to venture capital. Business angels, as well as corporate investors participated in a number of investments in Swiss companies, including Swisscom's investment in Unit.Net (Zürich), Advanced Silicon's (Lausanne) funding by an undisclosed Taiwanese chip company, and angel investments in Sensorix (Zürich) and TelcoPay (Zürich), each of which raised early stage financing of greater than €3.7 million each.

Outlook for the fourth quarter will see a slight increase in investment, according to Deloitte & Touche's Barometer survey. About 42 percent of those that responded said they expect to invest the same amount as previous months and 40 percent said they would invest more than they did in the third quarter.

A rosy future not guaranteed

What about next year? With semiconductors, nanotechnology and alternative energy sectors becoming the new hotspots for investment, according to Deloitte's survey, Switzerland will see sustained venture investments, as these are areas where the country is already exhibiting some growth.

The emergence of Swiss startups operating in nanotech, fabless chips and alternative energy, suggests that the country could "continue to out-punch its size in relation to its European neighbours," according to Weeks.

Not all industry participants agree with an upbeat outlook. A disturbing change that is not shown in these statistics sees some Swiss pension funds, the typical source of capital for venture capital investment funds, are cutting back on equities investment due to heavy losses.

"The pension funds are reducing exposure to all equities indiscriminately, including venture capital fund investments -- despite many of these having performed better then so called "blue chips" in the last two years," points out Lattmann.

Such behaviour is not in the interest of Switzerland's economic growth, says Lattmann, and it is a threat to the pension funds themselves in the long run. Without jobs, Swiss workers are not going to be contributing to pension funds.

But others argue that using private capital to boost economic growth and restricting investment geographically or politically is unwise. "Capital knows no borders. Whatever gets assessed in Switzerland has to be judged in a global context. If an investment is a good deal, then non-Swiss money will flow to the company too," points out Bruno Raschle, whose technology oriented fund of fund management firm Adveq controls more than SFr1 billion.

Raschle believes that many of the funds only have themselves to blame for lack of good returns and a cooling of interest by some pension funds. "Investors have too often financed only a business plan," he says. That is not venture capital.

"It must be about building value and great companies and investment appreciation," comments Raschle.

Deloitte & Touche's Barometer survey typically polls more than 234 Swiss investors, as well as 900 German and 74 Austrian investors and had a 30 percent response rate.

Key facts

Swiss venture capital investment stable for first nine months
Same amount total 2002 expected as last year.
Biotechnology firms attracted large amounts in first half but reduced in 3Q.
Future threatened by apparent cutbacks in pension fund equities.

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