Prefer to invest money in start-ups and SMEs rather than on the stock market?

Minus interest on the bank account and outrageously high real estate prices drove many investors to enter the stock market relatively late, when share prices were already at their peak and breaking more and more records. This has come to an end since the end of February 2020. Since the corona virus spread to Europe via Italy, stock market performance has turned deep red, and investors are currently losing a lot of money.

One thing is clear: the earth will continue to turn, and the markets will have to recover at some point. But even if a vaccine against the coronavirus were found today, we are not armed against further "aftershocks". So why not try something new and invest in start-ups or SMEs that create new jobs in Switzerland and strengthen the local economy?

Why do startups need money?

There are numerous companies that grow organically under their own steam and manage without investors or loans. But there are also companies that need money to develop new products. The money is used to hire product developers, buy computers or machines to bring the new product to market and is spent on marketing campaigns to accelerate sales growth at home and abroad and to expand sales. Without start-up financing for the launch phase, which often lasts several years, the new product cannot reach the market and the idea remains.

How do you get capital as a start-up?

While I myself was so convinced of my idea that I invested my last CHF 5000 all-in and opened my first company with it, there are others who collect money in their network, the so-called Friends, Families and Fools. Or go straight to angel investors or professional investors, because the necessary sum is higher.

There are numerous events at which start-ups present themselves. Preference should be given to events where the vast majority of attendees are investors, rather than service providers for startups or executives from larger companies who want to learn about innovations and trends. According to Thomas Dübendorfer, founder and president of the Swiss ICT Investor Club (SICTIC), it is highly recommended for private investors to discuss startups looking for money in a group of investors with experience as angel investors and to do due diligence on the startup together before investing. Angel investor clubs are best suited for this purpose. Dübendorfer's SICTIC has a good 300 investors; there is also Business Angels Switzerland (BAS) with just under 100 investors - both are active throughout Switzerland and do not charge investors a commission. Those who prefer to invest less actively in startups and leave the vetting and active monitoring of startups to others can invest in startups through a venture fund such as Wingman Ventures, Spicehaus, redalpine. Furthermore, there are online platforms such as investiere.ch, which prepare and implement startup investments for others ready for investment. With them, one usually invests in individual start-ups via a trustee. A commission is charged for this.

Investor or rather a credit

Product companies that can grow rapidly internationally and offer a product in a large market are attractive to investors. A loan is preferable if the company only needs money temporarily, already has larger sales and the loan can be repaid in the foreseeable future from the profits generated. Investors usually give venture capital as equity against newly issued shares in the company.

Challenges for start-ups in raising capital 

If a start-up needs capital, the big question is always what the company is worth at the moment and in the future. This is where opinions often diverge. Here, investors and entrepreneurs have to agree on the valuation. This requires a lot of experience, since no historical financial figures are available at the beginning. At the end of the day, this is the reason why I personally have said a friendly no to all projects so far. With a convertible loan, the question of valuation can be postponed until later by giving the early investors a discount (often 10% - 30%) on the share price in the next round of financing with professional investors, and by this time the financial figures needed for the valuation are often available.

Trivial, but as clear as daylight: no investor will invest in a company that doesn't have a plan. A start-up must know where it wants to go, what its business model is. And based on that, how the team is to be built up and how customers are to be acquired.

The quality of the team is just as important as the idea: it must be strong, reflective and capable of learning. Personally, I think it's crucial for a small company to be able to quickly take on board criticism and ideas and develop them further for the benefit of the company. And I must clearly feel the commitment of the founders for at least the next five years in order to consider an investment.

Business friendly climate

We must be aware that in Switzerland the startup ecosystem is extremely friendly and currently growing strongly. For one thing, Switzerland is a country that encourages entrepreneurship. For example, startups in Switzerland receive many services for free, e.g. from Innosuisse, IFJ, Genilem or genisuisse. There are also more and more new coworking spaces like Impact Hub, Spaces, WestHive or Office LAB, where young entrepreneurs and SMEs can get customized office workspaces on a subscription basis and exchange ideas in an optimal way. They only pay for what they need. There are also numerous opportunities for entrepreneurs to win prizes and awards.

What are the difficulties?

Robert Bühler, the founder of Peer-Energy AG, deals with the carbon footprint of people and is also sponsored by the ZHAW. According to Bühler, there is a lot of money that would be available for startups in our latitudes today, but it flows sparsely. One of the main difficulties is that the parties holding the money themselves have too little knowledge of what a start-up, which often operates vertically deep in a niche, is really doing. How good are the ideas and the team really? And what is the state of the market? That's why people are very reluctant to invest, and often invest intuitively or even as a favor.

For the start-up entrepreneur, the financing rounds are usually the biggest obstacles on his way up. Inspired by successful examples all around, he starts his journey, but too often stops again at the first major hurdles, because the feeling of security often outweighs the willingness to take risks. There are few start-ups that really fail, but very many that give up too early instead of pursuing their vision to success and fighting for it. This is where the wheat is separated from the chaff, i.e. the real entrepreneur from the pursuer of a good idea.

What do start-ups expect from the angel investor?

Start-ups expect an angel investor to identify with the company after his investment, to network it with potential customers and new employees. Angel investors often also serve on the board of directors. Many do this free of charge for the first two years. After that, they advise at a reduced hourly rate. For example, if the angel investor is a lawyer, he draws up the contracts more cheaply.

Personally, I think it is important that a start-up or SME consultant has himself had the experience of building up a company or a department in a company, developing it and, if possible, successfully exiting it with a handover to a suitable successor.

Does the start-up fit the respective investor?

Which investor fits which start-up depends on the business model, market, company location as well as the maturity of a company. In the early phase of a company, private investors are recommended, who are also called angel investors and who, in addition to money, also contribute their business network and experience. In a later phase, venture funds are suitable, which can help a company expand into new markets and make larger investments. Most investors focus on specific technologies, industries and market areas.

How do I find out which startup has the best return on my money and is the safest?

When investing in early-stage startups, it is best to pay attention to the quality of the founders and the potential of the business case. The earlier you invest, the greater the risk and the greater the potential return. If you prefer to invest when the new product is already on the market and generating sales, you can also get in later but pay a higher price per share because the product risk at this point is considerably lower than at the beginning.

Tips from the expert

This is what Thomas Dübendorfer, founder of the Swiss ICT Investor Club (SICTIC), looks at when investing:

As an angel investor, you should invest in five or more startups to keep the risk of failure low. You learn the most during the first start-up investments, which can help you a lot for later investments. Therefore, you should start slowly and not invest all your venture capital in one year. When investing, you should never jump in right away, but always sleep on it first and talk to other investors before you decide. Money that you need again in a few months should not be invested in startups, as it often takes five or more years for startup investors to be paid out when the company is sold. If you can't handle a total loss, you shouldn't invest in startups.