Theory vs. Reality: Venture Capital in Europe

Most investors understand how venture capital (VC) promotes economic growth. The flow of equity into innovative start-ups can fuel job creation and drive industry development. It lays a foundation for a breeding ground for innovation and inventions. Therefore, the amount of VC money spent in a country is a telling metric to grasp the growth potential and sustainability of this country’s economy. Indices exist to compare the VC climate in various countries. We at Verve Capital Partners were curious, what is the VC spent per capita in European countries; and subsequently, does the actual VC spent per capita correlate with attractiveness rankings?

Expecting that the “most attractive” countries would yield the highest VC per capita, some of our findings were surprising.

The analyzed European countries fell within five distinct groupings according to the actual amount of VC spent per capita.

GROUP ONE: $70-$60

Switzerland ($69) and the Netherlands ($62) had the highest VC spent per capita in Europe. As a benchmark, the U.S was calculated at $67. Switzerland’s leadership regarding actual VC invested is clearly reflected in its high attractiveness rank (#6) according to the Global IESE Venture Capital Attractiveness index. According to IESE, Switzerland scores well across all “VC attractiveness” dimensions analyzed – among those the quality of deal opportunities (i.e. a flow of technology spin-offs from its world-leading research universities) as well as its attractive taxation. But Switzerland’s top position is also made possible due to the help of foreign investors (Switzerland is a net importer of VC) and the expansive wealth of Swiss citizens. The Netherlands’ top position has to do with a similarly high VC attractiveness index (#9) and – very much like Switzerland – with a high GDP per capita.


GROUP TWO: $60-$50

Some Scandinavian countries – Sweden, Finland (both $59) and Denmark ($53) – also performed well above the $35 European average. Like group one, these countries’ excellent ranks regarding their actual VC spent are well founded by their VC attractiveness indices: #8, #12 and Denmark ranking #11. And again not surprisingly, their attractive VC environments are complemented by above-average GDP per capita.

GROUP THREE: $40-$30

The European average ($35) is exemplified by the U.K. and Ireland (around $39), Belgium ($33) as well as France ($31), whose actual VC spent already positions these countries well behind the second group. This group is the first to deviate from our expectations as most of these countries’ actual VC spent per capita is notably lower than their attractiveness rating would suggest. Especially the U.K. is commonly perceived to be one of the leading VC spots in Europe and its VC attractiveness ranking (#3) suggests the same. Much like France (#15 of the globally most attractive), this counter-intuitive finding might have to do with their centralistic economies focused on its large capitals. While especially London remains a leading VC breeding ground, peripheral regions and populations deflate the actual figures of VC spent per capita. There have been attempts to artificially create start-up hubs in the periphery, but more time might be needed for these initiatives to bear fruit.
GROUP FOUR: $30-$20

The next group of Norway ($27), Spain ($24) and Germany ($21) spends less VC per capita than the European average. In theory, the economic powerhouse of the European Union, Germany, with a population approaching 82 million is ranked #10 according to IESE’s VC attractiveness ranking and should thus be doing fine. However, actual VC spent is little more than $20. Norway (#14) is even more surprising, as one of the world’s richest countries with a GDP per capita of almost $55’000. The gap between a high VC attractiveness but a low rate of actual VC investments in countries like Germany and Norway – but also France and the UK – might be due to economies traditionally relying on heavy industry, manufacturing or wealth derived from natural resources. This heritage does not force entrepreneurs to constantly innovate and create new markets, while resource-scarce and smaller countries like Switzerland traditionally had to rely on high-tech innovation to stay competitive. Germany is known for being a financially conservative country with a rigid regulatory environment and a strong sense of investor protection. While these qualities are seen as positive for some attractiveness indices, start-ups require flexibility, rely on angel investments and can get bogged down with legal costs or bureaucratic constraints in their early stages. IESE’s index does not seem to attribute sufficient weight to these factors. Besides, a high corporate R&D activity (as IESE attests Germany for instance) might result in lots of patents but is not necessarily a good indicator for the innovativeness of a start-up ecosystem.

GROUP FIVE: $10-$00

The red lantern is carried by small countries such as Austria ($10), Portugal ($7) and Greece ($3) as well as one of Europe’s biggest countries: Italy ($1). This finding is consistent with low attractiveness rankings of Portugal (#34) and Greece (#44). Italy should be doing better according to the index (#28), however, Italy – like Portugal and Greece – has a GDP per capita figure below $31’000, so it simply lacks the financial potential of the north. Austria (#22), to the contrary, should think about ways to unleash the potential of its wealth: $40’400 GDP per capita.


Looking back at our results, we conclude that theory (in this case: the IESE index) and reality only match in countries with a strong VC activity. But the differences in other countries are very specific and depend on a mixture of cultural and economic influences – thus, they are very difficult to map in a comprehensive index.

While a relatively high investment interest in start-ups does exist in some European countries (groups one and two), this should not be seen by politicians and investors as a call to rest on their laurels. Many recent political initiatives to promote a thriving start-up ecosystem across Europe proved to be of limited success. Especially in wealthy countries such as high-spending Switzerland or low-spending Austria, enabling private investments outside of traditional investment vehicles such as VC funds has more potential to boost these economies. In this context, innovative concepts to channel the wealth of private investors to capital-seeking entrepreneurs with sustainable and innovative business models promise to be more effective in achieving this goal.

While indices such as the IESE VC attractiveness index provide a helpful framework for assessing the relative venture capital potential of different countries, they tend to obscure our view when it comes to finding solutions for fostering a vibrant start-up ecosystem. Understanding the needs of start-ups and VC investors goes beyond analyzing the political, social and economic macro-dimensions. Only if capital-seeking innovators and innovation-seeking investors are efficiently brought together, theory and reality will go hand in hand.

For a PDF version including an appendix with  raw data, details on the study method and a complete list of sources, click here.

Towards the “e-general assembly”: Switzerland’s preparation for the next-generation shareholder meeting

The (ordinary and extraordinary) shareholder meeting (SM) with all its formalities once was designed to be the place where shareholders gather, eat and drink, discuss agenda items and where the corporate decision-making process takes place.

Today’s SMs show a quite different reality: Companies with just one or a few share-holders usually hold SMs where all shares are represented and the manifold formal requirements for ordinary SMs don’t have to be followed (“Universalversammlung” as defined in art. 701 Swiss Code of Obligations). Large, often listed, companies hold a SM, but the horde of small shareholders present in the meeting only represents a minor stake in the company – they shout and cry, often unheard. In large companies, the decision-making process is, for good reasons, completed before the gates to the SM open and the shares are represented by a third party which was instructed earlier and has to vote according the instructions.

To adapt the legislation to today’s SM reality as well as to the new communication technologies, in particular the internet and videoconferencing possibilities, the provisions governing SMs will be updated. Due to the ongoing debate in the Swiss parliament, it is not foreseeable when this revision comes into effect and how the exact wording of the amended articles will be. But I have summarized a short overview of possibilities under the new legislation based on the most recent revision draft version and the appertaining report by the Swiss Federal Council.

  1. In the past years, many companies have held their SMs in different locations simultaneously. Xstrata, for instance, held its main SM in Zug, Switzerland (where its headquarters are) providing an audio and video live stream to a second location in London (where the capital is). Therefore, the revision of the OR (new art. 701a para. 2 – 4) in this matter reflects just an update to what has already been exercised.
  2. According to the new art. 700 para. 1 OR, the convening of a SM can be made by e-mail or facsimile, if the shareholder agrees. Independent of the invitation to the SM, the company has to give notice to its shareholders on the possibility to inspect the annual report and the audit report at the domicile of the com-pany (art. 696 para. 1 OR) at least 20 days prior to the SM. In case of bearer shares, this notice has to be published in any event in the Swiss Official Gazette of Commerce (SOGC). In case of registered shares, a notification in written form (regular or priority mail, e-mail) is sufficient. Hence, it is obvious that the cost cutting effect as well as the efficiency of an e-mail invitation is higher in a company with registered shares because no additional publication in the SOGC is necessary by law. The Swiss lawmaker is of the opinion that a company is not allowed to impose an electronic invitation on the shareholder if he/she didn’t agree in advance, even if stated in the bylaws – in opposition to today’s possibilities. The provision for the time being (art. 700 para. 1 OR) just demands a convocation according the bylaws – whether by regular or priority mail or e-mail. Especially smaller companies invite to the shareholder meeting by e-mail today.
  3. In any case, it stays necessary to deliver not only an (electronic) invitation but additional (electronic) documentation: list of agenda items, shareholder motions, information about the assignment of the independent voting proxy, proposals and comments of the board of administration and optionally the annual report.
  4. The board of directors lays down the procedure for obtaining the approval for the electronic invitation. It is the company that is responsible for the correct transmission of the electronic documents. Further, the board of directors has to make sure that every shareholder who accepted the convocation by electronic means receives the invitation and documentation in time by using some kind of electronic notice of receipt. Erroneous or failed transmission may infringe the shareholder’s participation rights. Based on today’s practises, the company shouldn’t be responsible in case the shareholder didn’t inform the company correctly about his/her up-to-date e-mail address.
  5. To ease the participation in SMs, shareholders – if expressly stipulated in the bylaws – will be able to attend a “traditional” SM via electronic instruments (internet, videoconference). In extremis, only the chairman of the shareholder meeting, probably members of the board of directors as well as the keeper of the minutes and, if applicable, the public notary and the auditor have to physically gather at the venue, depending on the agenda items. We could call this a “hybrid” GM.
  6. The last step of the electronification is the entirely virtual SM or “e-general assembly” (new art. 701d OR) without a physical venue. Such a virtual SM can be held under the conditions that (a) all shareholders agree and (b) no public deed is necessary for a vote’s validity on an agenda items (e.g. in case of a capital raise, art. 650 para. 2 OR). Hence, due to the de facto veto right of every single shareholder, an “e-general assembly” should only be considered for small and medium sized companies. It is the board of director’s task to obtain the consent of all shareholders for the virtual SM. As the SM must be convened at least 20 days in advance, it should be possible to invite the shareholders some days in advance (assuming a month prior to the SM) with the remark that the SM will be held virtually except a shareholder informs the board of administration about his or her refusal within the next few days.
  7. In any case, shareholders who are electronically joining a “hybrid” or entirely virtual SM have to be identified by the company – ideally via a virtual signature that is approved by the regulator (art. 14 para. 2bis OR). With the launch of suisseID, the lawmaker has already layed the groundwork. The board of directors is well advised however, to give the shareholders some kind of guidelines for obtaining of the virtual signature and the identification with the company. Furthermore, shareholders present via electronic means must be able to file motions, participate in discussions and the company has to assure that the votes are correct.

But what if the internet connection lags, the server of the company crashes and shareholders are no longer able to “attend” the SM? What if a shareholder talks and talks but forgets to switch on the microphone at home?

In case of technical problems, the “law without exception” demands a repetition of the SM (new art. 701f OR). This absoluteness is hardly justified. If the company’s server is overloaded and shareholders are rejected “entering” the virtual SM, a repetition seems adequate. On the contrary, it shouldn’t be made the company’s problem if the internet connection of an individual shareholder’s residence is interrupted, simply too slow or if his/her hardware isn’t set up properly. In such case, a repetition of parts or the whole SM is not justifiable.

If today, a shareholder misses the bus or loses his or her entry card to the SM, no one would accuse the company of infringement of shareholder participation rights.

Is Switzerland short of ideas and innovation? Wrong, we’re lacking venture capital!

You missed our continuous blog posts? Sorry for that, but we have been busy fixing another problem: the lack of Swiss venture capital.

Startup financing has become even more challenging as the private equity sector is still struggling after the financial crisis. According to Swiss private equity organisation SECA, annual investment volumes have decreased from 600 million CHF in 2007 to just about 400 million in 2009.

This decline is even more dramatic for new ventures if one takes into consideration that the lion’s share was used for later stage investments. Only about one third of 2009’s venture capital flowed into companies in seed or early stages – down from two thirds in 2007! As a result, lots of ideas and innovations simply could not be commercialized. “For our long-term competitiveness venture capital is essential”, SECA General Secretary Maurice Pedergnana, concluded in an interview for

Steffen mentioned in one of our previous posts that over a period of ten years (1998 – 2007), only 27% of ETH Zurich startups managed to obtain venture capital funding, whereas close to 60% of the UK university spin-offs were backed by venture capital. This puts the SECA figures in perspective – especially when taking into account that the data was collected before the financial crisis started to affect startup financing. So if the share of venture capital funded companies was already on an insufficient level before the crisis – with more potential capital available and a higher share of seed and early stage investments – we do have a real problem at the moment!

On the other side, Swiss Universities have done a good job fostering innovation. In particular the Ecole Polytechnique Fédérale de Lausanne (EPFL) has done a great job in linking research and business to bring technology transfer forward. Since Patrick Aebischer took over the presidency in 2000, EPFL diversified its portfolio both in technical sciences and the bio-tech/med-tech-sector. Despite the past turbulent years they were able to retain their annual numbers of about 30 spin-offs.

If it takes both innovation and early stage capital to substantiate Switzerland position as an innovation hub, then EPFL gives an wonderful example how the first aspect can be addressed. But with respect to the early stage capital needed, a paradigm shift in the early stage financing market is overdue! We should have a close look not only towards the US, where seed stage funding is comparatively strong, but also on alternative financing concepts coming up. We will be sharing some experience from the first funding rounds on in another blog post.

Read More… is the first open platform facilitating direct non-listed investments

Today, we launched – globally the first platform providing small investors access to direct investment opportunities in non-listed companies. Unlike business angel clubs and networks, our offering is not restricted to “accredited” or so-called “qualified” investors.
On the platform, even small amounts can be invested in some of the most promising Swiss startups and it guides investors through a well structured investment process. As a start, three exciting young technology companies have been selected.
With this step, we will continue to support a culture of entrepreneurship in the general public and to realize our vision of a social economy. We help innovative entrepreneurs in early stages to bridge the equity gap and allow small investors to take a stake in the SME economy.

More and more solid university spinoffs in Switzerland

An article in yesterday’s NZZ pointed out that the number of Swiss university spinoffs is continuously growing. Even more interesting is the fact that Swiss university spinoffs could be the most solid worldwide, outperforming even MIT in Boston or OxfordAn LSE study analyzing 130 ETH Zurich spinoffs over 10 years suggests that about 90% of these startups survived the first 5 critical years resulting in an average annual IRR of more than 43%. Recent examples are Esbatech, a University Zurich spinoff or Glycart, an ETH Zurich spinoff that both were sold to large corporates for a couple of hundred million dollars. The NZZ author concludes that “these results are positive signals for many investors that by now in Switzerland you can do profitable investments in startups”. Also noteworthy is the fact that only 27% of ETH Zurich startups managed to obtain venture capital funding in the past. With UK university spinoffs this ratio is 60%. To close this gap, innovative funding approaches are needed.

Survey findings, part 3: Investor motivation beyond the homo oeconomicus

In part 1 of our survey findings, we presented three distinct groups of ordinary investors. In part 2, we discussed common concerns among likely and less likely SME investors. But what are the main reasons for small investors that would justify investing hard-earned money in alleged risky startups and SMEs?

Not surprisingly, for all survey participants, risk/return as well as diversification considerations are the main drivers for such an investment.

For those individuals who are likely to invest, based on interest, risk profile and willingness to invest time (group 3 = 8.5% of investors), the joy of contributing own skills and expertise to the venture is seen to be another important factor. This non-economic factor, however, is closely related to economic considerations as the majority of this group is confident of being capable of adding value through their personal involvement in business matters (often referred to as “smart money”).

In addition, individuals from this group (as opposed to groups 1 and 2) underline the importance of diversification, indicating that having an investment outside the established financial markets would be an important factor.

Being confronted with other potential non-economic or altruistic motivations, group 3 reacts at best neutral. As if to underline the paramount importance of economic considerations, the average group 3 investor even disputes that the promotion of the local economic development through support of SMEs and young entrepreneurs would be an important reason to get involved.

In short: the majority of group 3 couldn’t care less about non-economic factors. Being clear-cut homines oeconomici, they consider SME investments to be yet another investment opportunity economically competing against other offerings. No time for romance.


Group 2, all individuals with an interest to invest but not belonging to group 3 (35%), also attributes paramount importance to risk/return considerations but their motivational profile is much more complex. So far, all participants within that group indicated at least some degree of agreement with respect to all altruistic and most non-economic factors. In particular, they are more likely to become involved if two non-economic factors are taken into the equation: The average group 2 investor aims to support innovative ideas and young entrepreneurs.

In consequence, there is a huge potential for raising risk capital from an even broader public and beyond the homines oeconomici, if capital seekers succeeded to address two issues. Firstly (and as discussed in our previous post), the most common concerns of group 2 have to be dispelled. And secondly, the innovativeness and social relevance of a business opportunity needs to be communicated.

Participants were asked to give answers even if they did not indicate an interest in SME investments. And given the hypothetical nature of this scenario to group 1, results need to be interpreted very carefully. One finding however is noteworthy: altruistic and non-economic factors play an even more important role than for group 2 and 3 participants.

If we take into consideration some of our previously published findings, we can draw some first conclusions on how motivations of small investors differ from those of formal VCs and other informal investors.

  1. Small investors are equally focused on the economics of an investment but have more patience/long-term orientation than formal VCs
  2. As opposed to formal players, the majority of potential small investors take additional non-economic factors into the equation
  3. However, in comparison with other informal investors in the friends and family space (often driven by friendship and favors), small investors are clearly more economically minded

Quite clearly, if we want to pinpoint typical behavioral profiles of likely investors, it will be necessary to do a more detailed segmentation based on our data. Come back, we will do that soon – and in the meantime, let us know your thoughts on what could be feasible dimensions to slice and dice groups 2 and 3!

Survey: N=176, including only participants from Germany, Switzerland and Austria in evaluations

The paradigm, part 4: Equity gap or overhang?


An entrepreneur in need for capital might be confused. In the finance industry as well as the media, two buzz words make the round: “equity gap” and “equity overhang”.

Equity gap and overhang are not two sides of a coin. In general, the term “equity overhang” refers to the gap between funds raised and funds invested and thus to a problem institutional investors are facing.  The term “equity gap” is used in reference to the gap between funds required and funds invested and thus relates to a problem entrepreneurs are facing.

Based on these definitions, a first answer to the question raised in the title of this post is: both! Depending on a company’s industry, stage within the company life cycle, and amount of capital required, today’s capital seekers find themselves in one of three clusters of the graph shown on top.

The red cluster of our “private equity cube” indicates which companies typically suffer most under the equity gap. According to the OECD, these are mostly seed and early stage innovative SMEs (“ISMEs”). While figures are difficult to obtain, in the U.S., this gap is said to be around $40 billion. Within this red cluster, first and foremost, entrepreneurs requiring between 200k € and 2 m € are affected, as these amounts are too large for informal players such as business angels but too small for VCs and private equity firms (corresponding to the medium layer of the red cluster). Currently, the only cure for these young and innovative SMEs are business angel syndicates and publicly backed funds, such as CTI Invest in Switzerland or the “Enterprise Capital Funds” in the UK. But the volumes provided by these players are still way too small.

The green cluster, on the other hand, indicates which companies in need for capital are most fought over: expanding or turnaround companies requiring >2m € capital. Only players of the formal private equity industry, such as venture capital firms (“VCs”) and private equity funds, or funds of funds respectively, play in this field. As of April 2009, current figures for the U.S. indicate an aggregated overhang of $400 billion. While the numbers differ, this situation applies globally: VCs are sitting on loads of cash but for two reasons hesitate to invest – due to the economic slowdown and due to a tendency of increasing minimum deal sizes in the formal private equity industry.

But what if an entrepreneur finds himself in the white cluster? First of all: he or she will have to rely on his own funds and capital from informal investors. And three rules of thumb apply: (a) the bigger the required capital, the more difficult it will be to find FFF or angel money; (b) the riskier the business model, the more difficult; (c) the earlier in the business lifecycle, the more difficult. Thus, even white cluster companies are confronted with an equity gap, just less severe than red cluster companies.

In wrapping up posts 1 to 4 on the investor’s paradigm, it seems that market inefficiencies are the overarching problem: from an entrepreneur’s perspective, if your business does not match the preferences of formal VCs and private equity firms, and from an investor’s perspective if you do not happen to qualify as an “accredited” or “qualified” investor. In other words: the majority on both sides relies on the quality of their personal networks.


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