Here’s why Switzerland needs to invest more in startups

The Confederation has all the means to imagine itself as the new “Unicorn Nation”, provided it avoids the stigma of failure and thinks “outside the box”.

A plethora of studies and reports declare Switzerland a global driving force for innovation and competitiveness. This should, in theory, provide fertile ground for the development of new companies and the acceleration of their growth into global players. However, this underlying strength does not seem to fully translate into “ground power” in the startup ecosystem across the country, thus constituting an all-Swiss innovation paradox.

This shows that great framework conditions may not be enough to foster high-performing startups and that innovation is also a mindset that needs to be fostered in society.

The Confederation is number one in innovation

Since 2011, Switzerland has been the world’s most innovative country according to the Global Innovation Index (GII) ranking, published annually by Cornell University, INSEAD and the World Intellectual Property Organization (WIPO). The latter performance is also linked to one of Switzerland’s main strengths in these rankings, namely its rate of patent filings.

While these rankings are strongly supported by the quality of its universities, their research, and high corporate spending on research and development, they also underscore the importance of what might be called institutionalized, and incremental, innovation peculiar to the country.

One could argue against entrepreneurial and disruptive innovation, which is most often carried out by start-ups and entrepreneurs. Unfortunately, disruptive innovation is often associated with creative disorder, a state that is inconsistent with the fundamental condition of Switzerland’s success: its stability.

Entrepreneurial spirit and Switzerland’s many SMEs

Switzerland is certainly not lacking in entrepreneurial spirit. In fact, the state’s economy was built and continues to thrive on small and medium-sized enterprises (SMEs), which make up 99.7 percent of businesses and employ nearly 68 percent of the Swiss workforce. In 2016, more than 39,000 new companies were founded in Switzerland, 300 of which are what we call startups.

Unbeknownst to the general public, many of these SMEs are hidden, highly successful global leaders in their fields, with resilient businesses built on the highest standards of service or the latest technological advances, often developed in-house.

The culture of failure or lack thereof?

This strong entrepreneurial tradition tends to be counterbalanced by a well-known risk aversion. In fact, the country’s institutions and social structures even encourage conservative, risk-averse behavior. It can be argued that the success of Swiss institutions, the political system, and the economy in general has been built on stability and conservative decision-making. However, this may also be the main obstacle to the development of a true risk ecosystem, representative of the country’s innovative strength.

“Forget Fail Fast,” a 2018 study by Deloitte agency Touche Tohmatsu, stated that “true innovation can often require permission to fail; otherwise, innovators may feel that the risks of trying something truly new are simply too high.” This is not to say that the country should start encouraging failure, but that failure should be allowed, free of negative social stigma.

Fear of failure is strongly correlated with the aforementioned risk aversion and remains in the Swiss mindset. This prevents many young entrepreneurs from taking a leap of faith when deciding to start a new company, or an investor from listening to his or her instincts when deciding to inject significant capital into a new venture.

How to bypass a risk-allergic company

Compared to other countries, Swiss start-ups generally grow at a much slower pace. This could be explained by the fact that they often develop very complex products for highly specialized applications, thus requiring much more research than a typical start-up in the Internet age. The cultural factor may also lead Swiss entrepreneurs to choose less risky paths and strategies with a high probability of success. Finally, it could be related to the availability of venture capital.

However, the Swiss startup funding ecosystem has improved significantly in recent years. This has contributed to the record amount of CHF 1.24 billion invested in such companies in 2018. However, a high percentage of the invested capital still comes primarily from foreign sources (over 70 percent in 2017). While seed funding has increased in a healthy way, it remains very challenging for startups to find growth capital that can be brought in from institutional investors and allow them to reach the next level.

Starting in February 2019, the new CHF 500 million Swiss Entrepreneurship Fund was launched, publicly supported by former Federal Council member Johann Schneider-Ammann. This is a major step forward in strengthening the financing possibilities for high-potential local start-ups.

Switzerland as “Unicorn Nation” of the Future

As the world’s champion of innovation, the Swiss venture ecosystem is still in its infancy and has a lot of ground to cover to catch up with global industry hubs. However, all the ingredients are available to package a good dish.

Fostering an entrepreneurial mindset, along with a greater appetite for risk by the Swiss investment community and a more general acceptance of failure as a learning opportunity, could unlock the true potential of the Swiss Confederation to create a number of so-called “unicorn” start-ups, those innovative companies – not yet listed on the stock exchange – that have reached a market valuation of at least $1 billion in a short period.

This is not to deny the traditional commitment to stability and well-considered decision-making. However, it is fair to argue that the system should evolve to support young entrepreneurs in taking calculated risks and seizing unique opportunities when they arise.

A rational alternative to ultra-low interest rates

In the current economic environment of low interest rates, all institutional investors are looking for attractive returns. If 0.5 percent of all assets managed by Swiss pension funds were invested in ventures, domestic investors would already bring in nearly 4 billion francs. Perhaps, in addition to initiatives such as the Swiss Fund for Entrepreneurs, a more systematic allocation of capital to start-ups should be implemented. A stronger funding environment could also attract potential foreign “unicorn” companies (to date these are in the USA and China) and encourage them to establish their headquarters in the Alpine nation.

Switzerland could further grow from being number one in institutional and academic innovation and become a true innovation driver and a hub for the development of new global business models. The country has historically been a pioneer and has always followed its own path, thinking outside the box compared to other nations. And even today it is time to think “outside the box”.