Writing down and writing off – Swiss VCs continue clean up

Analysts say the growth potential of firms such as Obtree Technologies is much reduced. www.obtree.com

Two more Internet-related bankruptcies filed in May, by Viviance AG and Enterprise Communications AG, suggest that the bursting of the Internet bubble that began in mid 2000, is still playing itself out Switzerland.

Viviance and Enterprise Communications, two information technology companies, belonged to a crop of venture capital-backed startups that were riding the Internet wave with big plans to go public on the Swiss Stock Exchange’s New Market.

Swiss Venture Update compiled a list of fourteen firms, all venture-backed, that were close to going public when the market began to dive in 2000. Of the fourteen firms identified, eight no longer exist (see list below). Six companies remain. However, with the exception of Vivastar, which is actually on the brink of rapid growth (it is included in the list only because it announced an IPO at the same time as the others), the growth potential of the surviving firms, 4-Media Group, Upaq AG, Bluewin, Inalp Networks AG and Obtree Technologies, is much reduced.

According to private equity and venture capital industry norms two in three investments fail to produce satisfactory returns. Normally it does not happen so fast.

Swissinvest.com AG was liquidated last month. Others, such as Singularis AG, Viviance New Learning SA, and Enterprise Communicaitons AG went bankrupt, all within the past twelve months. Meantime, Lysis AG was acquired by Kudelski. Real Media was acquired by US media company 24/7, and Qualicklick acquired by Adlink. Telecommunications operator, Red Cube AG, was acquired by Ultrak.

With the exception of the Lysis acquisition, these takeovers occurred at a much lower company valuations than when the venture capital investors purchased the shares, causing the investors to write down the value of their shares. Venture capital investors received a small amount of proceeds greater than the cost of the shares but not the same value as the shares had been accounted for on the books.

In some cases the acquirer’s shares decreased in value to below the cost of the venture investment, causing a complete write off of the investment. A write off is a write-down of a portfolio company’s holdings to a valuation of zero. Venture capital investors receive no proceeds from their investment.

Writing off and writing down

The process of writing down is a necessary part of portfolio management and is required as part of regular investor reporting to keep fund investors properly informed of the current net asset value of the investment fund. The write down process for venture capitalists picked up momentum last year, the first in recent times where divestment by writing off exceeded any other category of exit for private equity investors.

According to a survey of a sample of Switzerland’s private equity and venture capital investors by PriceWaterhouseCoopers and the European Venture Capital association, SFr 73 mn was divested due to write downs out of a total of SFr 157 mn in divestments last year. In other words 24 divestments out of a total of 68 divestments were writedowns.

A huge decrease in divestment by public offering resulted from the crash of the stock market. Divestment by public offering dropped from SFr 120 mn in 2000 to SFr 16.4 mn in 2001. Divestment by trade sale in Switzerland stayed fairly stable at SFr 33 mn in 2001 and SFr 30 mn in 2000.

Existing portfolio firms still on the books of venture capital investors, many of which have missed revenue and growth targets are also being re-evaluated. There will be further write downs this year.

Fortunes won and lost

Fortunes have been lost but not by all investors. Some managed to avoid over-investing in bubble technology firms, got out at the right time or some combination thereof and have been able to raise new capital in the past few months, including Index Ventures and Armada Venture Capital Group.

But the impact of massive write downs is undoubtedly going to hit the Swiss venture capital scene by forcing a consolidation trend, especially amongst the smaller and newer players. The air is ripe with rumors of upcoming mergers and acquisitions, many of which Swiss Venture Update is following now.

Bruno Raschle, founder of Adveq and a veteran of the private equity industry here, says that one third of the players in the private equity and venture capital industry will disappear in the coming months. It is a matter of the survival of the fittest, a very natural evolution of the market.

One thing is clear, those venture capitalists that managed to add value to their funds and generate positive returns will be in a great position to invest the improved and more experienced next generation of Swiss technology companies. In fact that trend is quite clear when looking at investment statistics that show that quality Swiss high tech firms are still attracting capital even in times of turmoil.

by Valerie Thompson

Company Name (what happened)
4-Media Group (Downsized and struggling)
Bluewin (Losing moneyIPO cancelled)
Enterprise Communications (Technology acquired by Ansid. Bankruptcy filed.)
Inalp Networks (New business model and >20 SFr million in funding )
Lysis (Acquired by Kudelski)
Obtree Technologies Inc. (New business model and >20 million in funding)
Qualicklick (Acquired by Adlink 04/02)
Real Media (Acquired by 24/7 Inc.)
Red Cube (Acquired but shares written off by investors)
Singularis (Bankrupt)
Swissinvest (Liquidated. Shares written off by investors.)
Upaq (New business model. Shares devalued.)
Viviance New Education (Filed for bankruptcy May 02)
Vivastar (launched new DVD-R product. Just closed new capital round)