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Swiss venture scene: adapt or die

The Swiss private equity industry met at the ConventionPoint at the Swiss Exchange

The Swiss private equity and venture capital industry gathered at a congress last week in Zürich at Swiss Exchange's ConventionPoint.

The content of the one day confab, a yearly event, reveals the industry here is struggling to digest the lessons learned over the past few years.

There is a need to rebuild trust among institutional investors due to a high number of failed technology firms on the Swiss market.

Venture capital fund managers are having a tough time attracting institutional capital, according to Swiss Private Equity and Corporate Finance Association (SECA) president, Massimo Lattmann.

While SECA's new mantra is that the private equity industry in Switzerland has evolved from a club to an institution, the sector is going to have work hard to improve its image and to educate the public about how private equity investments can be valuable.

This year many venture capitalists concentrated primarily on existing portfolio companies, restructuring, and weeding out the weak players. They invested about €235 million in innovative Swiss companies, according to Tornado Insider publications in Amsterdam, a figure similar to what was invested last year.

Many venture capital fund managers who are at this moment trying or planning to raise new capital for new funds are fighting hard to convince reluctant institutional investors to invest.

It is a far cry from the go-go, high rolling nineties, but a sold out crowd of 350 professional private equity and venture capital investors, as well as entrepreneurs, at the event last week signifies that the sector is enduring.

The most adaptable, as in Darwin's theory of evolution, will survive, say practitioners who attend the event.

Trust lost

Many pension funds, institutional investors, and high net worth individuals are stopping allocations to the private equity sector, according to Lattmann.

Changes in willingness to take a risk is one reason, but a change in sentiment is also a factor. The past two years has seen trust in private equity and equities eroded. To restore confidence, SECA is speaking out on a number of topics.

"SECA is offering to increase transparency on what went wrong in order to avoid future mistakes," says Lattmann who is also a founding partner of Venture Partners AG in Zurich.

Many things went wrong during the stock market bubble that need to be explained, say practitioners. Specifically a number of firms went public on the Swiss New Market that probably should not have.

They were too young, did not have scalable business models or even a real business model, making it impossible for them to grow into strong mid-sized public companies.

But according to Lattmann, there is no need to throw the baby out with the bathwater. "There was plenty that went right and has stayed right.," says the venture capital fund manager. The wild west period is over now, he said. The industry needs to build trust and it will do so via transparency.

Guarded optimism

Some 20 hardy CEOs and COOs of innovative young firms made pitches to the congress visitors in hopes of making contacts or getting leads on expansion capital.

Among entrepreneurs guarded optimism prevails. "It is still possible to raise money today if you have a good product or service and a recent track record," says Alan Tawil-Kummerman, CEO of FotoWire SA (Geneva) one of the firms who presented at the congress last week.

Many hosted small stands at the event which was held at ConventionPoint at the Swiss Stock Exchange. Throughout the day they made their pitches in hopes of finding new capital or investors in three sessions loosely grouping the companies by industry, such as life science, electronics - nanotechnology, and information technology.

A number of them report getting good leads to potential new investors. However, software startups who attended the event report a deterioration in their ability to raise outside capital for growth.

Europe-wide, software firms are an attractive investment aim of many venture capital firms. Even in Switzerland where most software vendors target narrow, global market niches, software companies have been attracting significant sums of capital for the past three or four years.

Software development firm, Boxalino AG, housed at Technopark in Zurich West, reports that many of the venture capital companies are not in a position to spend money and that those who are investing tend to be interested in nanotechnology and biotechnology firms.

Until capital markets start to function again, Boxalino and others like it, such as Infonoia of Geneva, which actually cancelled its appearance at the congress, are putting international expansion plans on hold until better times and better investment conditions prevail.

Valuations are a huge problem these days, say entrepreneurs and venture capitalists, alike. The current and potential value of shares in a private company is a key figure in determining how much money investors will put up for a round of investment.

Lower valuations in later rounds, so called down rounds, has lead to dilution amongst early shareholders, especially employees and founders, many of whom are struggling to stay motivated at a job with a low salary and pitifully low priced shares.

A lack of co-investors has made funding innovative companies much tougher this year, according to Lattman. A venture funded company usually takes two or three rounds of capital before breaking even.

The normally deep-pocketed investors, such as banks and other institutional investors, have shut down their private equity activity and are not following through with investments in subsequent rounds of investment in companies that they had backed in earlier rounds.

"The core VC's like us have to essentially finance companies alone to break even," says Lattmann. This puts a lot a financial strain on venture capital funds, plus it increases the risk of investing. Having to put more into existing portfolio companies leaves little capital for investing in new deals.

By Valerie Thompson

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