Along the growth curve

They create thousands of highly skilled jobs and have made Switzerland a hotspot on the global innovation map. What scale-ups need–and what they are still missing–in Switzerland.

The former TOP 100 startups SOPHiA GENETICS, Scandit, and Beekeeper have something in common: they have managed to change the rules in their respective market segments–individualized medicine, goods, logistics, and employee communication–with disruptive innovations. All three are growing strongly, operate subsidiaries on more than one continent, are valued at more than CHF 1 billion, and employ several hundred people.

In 2017, the ETH Domain had the economic importance of its spin-offs examined. The result showed that the almost 700 spin-offs existing at that time at ETH, EPFL, EMPA, PSI, EAWAG, and WSL employed an average of 10 people.

For Patrick Barbey, director of Innovaud, the innovation promotion agency in Vaud, the findings of the spin-off study did not come as a surprise. He already knew that Swiss high-tech startups were not exploiting their growth potential. A trip to Greater Boston–one of the most dynamic innovation ecosystems in the world with the two top universities MIT and Harvard–had opened his eyes: "I saw that the companies that today are called scale-ups have completely different needs to startups."

Back in Switzerland, Barbey went into action and launched Scale Up Vaud. The platform connects Vaud scale-ups with each other, brings technology, human resources, and marketing managers into a conversation, and offers targeted training; for example, being listed on the stock exchange.

Barbey, an electrical engineer, keeps precise statistics: the 43 scale-ups in Vaud–including Nextthink, Abionic, and SOPHiA GENETICS–have created 6,000 jobs since their foundation; about 850 jobs were created last year alone. The inflow of funds via capital increases and convertible loans exceeded the billion mark for the first time in 2021.

"A lot has happened in the last few years," says Aleksandra Laska, partner at venture capital firm Redalpine. However, the potential is still great.

The Polish-born entrepreneur, who worked at Goldman Sachs in London and a British metaverse scale-up, describes the reserved Swiss mentality as an obstacle: "There is often too little big thinking," she criticizes. Many founders expand relatively quickly into German-speaking countries, the DACH region, but then neglect to tackle the global market.

There are also regulatory obstacles to growth: the third-country regulation applicable in Switzerland makes obtaining a work permit for non-EU foreigners an adventure that can last several months.

The example of the booking platform GetYourGuide shows where this can lead. Co-founder Pascal Mathis recalls: "We simply couldn’t find enough suitable employees in Zurich." The gradual relocation of the company’s headquarters from Zurich to Berlin was the logical consequence.

Recruitment of skilled workers is further complicated by the local taxation of employee stock options. Since scale-ups are rarely able to pay market wages for their highly qualified employees, they offer instead the opportunity to participate in the company. In Switzerland, however, this is far less attractive than abroad, since the tax offices consider employee shares as a salary component to which the local income tax rate applies.

850 New Jobs in One Year

For Mathis, who now works as an investor, this practice harms not only the scale-up but the entire ecosystem. "In other countries, yesterday’s employees–who have now become rich–are tomorrow’s founders."

As far as the taxation of employee stock options is concerned, Barbey is not optimistic. "Swiss federalism stands in the way of a quick solution," says Vaud’s top innovation promoter. In his opinion, a figurehead who could put the issue on the national agenda would help.

Things look better when it comes to the issue of funding: the cross-party consensus is that the current situation is unsustainable. In the three years between 2018 and 2020, only a third of venture capital invested in Switzerland came from Switzerland, with American, British, and German funds investing primarily in later-stage and scaleup companies, and quite often taking control.

On 22 June, the Federal Council announced that it would create a national innovation fund, with the focus explicitly on investment in companies in the scale-up phase. The Federal Department of Economic Affairs, Education, and Research (EAER) is mandated to submit initial proposals on the volume and structure of the new national funding instrument by the start of 2023.

"A state innovation fund would be a welcome boost for the ecosystem," comments Redalpine partner Laska. And says Mathis: "It would help us to build even more national champions with international appeal."

SCALE-UP PROGRAMS

Scale-up Bootcamp
The half-day scale-up bootcamps, conducted by Venturelab, bring fast-growing startups together with Swiss industry leaders. The aim is to initiate pilot projects, partnerships, and strategic investments. The offer is supported by digitalswitzerland, the Gebert Rüf Foundation, and Venture Kick.
scaleup-bootcamp.ch

Scale-up coaching
The national innovation agency Innosuisse supports start-ups in the growth phase with customized coaching. In an initial two-month phase, the company’s growth strategy is examined for strengths and weaknesses. The second phase involves the adaptation of organizational processes and structures.
innosuisse.ch

Scale Up Vaud 
The pioneer of scale-up programs. The offer from Innovaud, the Vaud innovation promotion agency, focuses on networking and further training for scale-ups based in the canton. Innovative companies with 10 employees that have grown by at least 20% over three years are eligible.
scale-up-vaud.ch

This article was originally written by Jost Dubacher and published in the TOP 100 Swiss Startup Award Magazine 2022.