Sunday, July 30, 2017

Startup Scene: Why are there no Unicorns in Switzerland?

Since the term was coined a few years ago, unicorns have become the mythical creature of the venture capital industry: privately held (tech) startups with a valuation of more than a billion dollars.

What is a Startup?

While indeed extremely rare (about 200 globally), the concept of unicorns helps to clarify what people instinctively mean when they say "Startup" - specially when used as an anglicism in other languages.

The most literal definition is a new company. But for that matter, most new companies are restaurants, gas stations and other small business. Or maybe being high-risk? By that definition restaurants qualify as well as many fail within a year. What about being innovative? Most successful innovation is created by large established organizations which have large R&D budgets and who can often attract the top talent in a given field.

My favorite definition of a "Startup" is the one by Steve Blank:
A startup is an organization formed to search for a repeatable and scalable business model.
This definition emphasizes on the potential for significant and potentially very rapid growth, which also implicitly requires to take aim at a significantly large market which would allow for such growth. Venture capital investors typically look for opportunities to make a 20-30 times return on their investment in less than 10 years to compensate for the failed ventures in their investment portfolio. Hence most venture capital backed companies have at least theoretically a big growth potential.

Swiss Startup Landscape

With Switzerland being at the top of the UN Global Innovation Index for the last 7 years is home to global financial market and some of the worlds leading universities, some wonder why its startup scene does not rival other global hot-spots in fame or fortune?

Critics of the Swiss Startup landscape often point to an extreme form of European culture which does not value risk taking nor forgives failure, a safe, comfortable and expensive life with plenty of attractive employment opportunities, an overly aggressive wealth taxation or a lack of B+ round growth capital from venture capital funds.

While there may be truth to all of this, the Swiss startup scene might also be for better or for worse an image of the overall Swiss economy which mostly excels at being highly specialized global niche-players. The classic success story is a company that is export oriented, with a high-margin/high-value add product that is prohibitively hard to replicate at the same level of quality. Often a small to mid-sized company can be world-market leader in their specific narrow domain.  Hyper-scaling and reaching for the stars is rarely part of that DNA.

An overvalued currency, high cost structure and small domestic market renders almost any other activity noncompetitive at a global scale - a strange twist on the Dutch disease.

For a mainstream consumer product, the Swiss domestic market is barely the size of New York City or the San Francisco Bay Area and fragmented into several language regions and 26 very much sovereign jurisdictions. For somebody growing up thinking that Zürich or Genève is a large city, it is maybe possible to intellectually rationalize a market of a billion consumers, but intuitively grasping what this could mean is a whole different story.

With many founders, employees, experts, advisers, mentors, role-models or investors coming from a business culture which values focused excellence and reliability, Swiss startups are more likely to tackle hard science-y problems with a highly specialized and limited application domain rather than chasing after the mainstream consumer zeitgeist. They are also more likely going to delivery on what they promise.

(image: wikipedia)

Observers of the Swiss startup scene may have to accept that startups around here are a bit sturdier, a bit more down to earth and bit less mythical than they might like. But instead of trying to copy Silicon Valley culture to the letter, it might be helpful to consider what particular environmental advantages Swiss startups have at their disposal, that they can leverage into their own version of success - even if that doesn't involve a billion dollar valuation.

And despite all this, there are - at least according to some lists - currently two members in the global unicorn club of about 200. And pro-rated to an eight million population that's quite a bit above average.