SIX as Venture Capitalist

On the TV show “The Lion’s Den”, enterprising founders venture to present their startup companies to the public in the hopes of enticing renowned entrepreneurs to invest in them and mentor their startups on their next steps. The investment process at SIX FinTech Ventures, the venture capital arm of SIX, proceeds similarly yet differently because in reality, it’s the investors themselves that woo startups for good deals in light of the tough competition in the venture capital business. The SIX FinTech Ventures team goes on the lookout itself for suitable startup founders primarily in Switzerland, Spain, and the rest of western Europe and underwrites, for example, payment transaction, open banking, and ESG solutions for SMEs and nascent technological solutions based on blockchains or artificial intelligence.

Venture capital (or risk capital) firms use their own money to help startup founders implement innovative ideas that no bank would lend debt capital to finance due to their high risk of commercial failure. SIX FinTech Ventures invests sums ranging from CHF 300,000 to CHF 2 million in the early-stage segment. Early-stage startups typically already have a product and initial customers and are in a phase of rapid growth.

In addition to making a financial investment, the SIX FinTech Ventures team assists startups with its experience and know-how in various management topics such as strategy, marketing, human resources, and geographical expansion. The team also always works in close cooperation with other investors. The high risk of an investment in startups is factored into venture capital stakeholdings. SIX builds up a portfolio, working on the assumption that few startups will be successful in the long run but that very high profits can be earned with the ones that ultimately do prosper. This means that successful startups have to grow quickly to offset the failure of other investments. A rule of thumb says that two out of ten startups should ultimately prove successful.

SIX is never the sole investor in a startup, but instead always teams up with other investors. “Besides us, typically there are two to three other new investors in the funding round as well as incumbent investors such as business angels from previous funding rounds,” SIX Senior Investment Manager Maximilian Spelmeyer explains. Business angels are investors who invest very early on in startups. It is important to SIX to share the risk and to create extra added value for the company.

“Gut instincts play a key role at the start and end of an investment process. You usually get a good or bad feeling about an investment pitch very quickly right from the outset. And in the end, shortly before making an investment decision, you have to firmly believe in the company and its future success,” Spelmeyer says. There is usually a long journey between the starting and end point. Extensive research and thorough due diligence validate or refute the initial good feeling.

When conducting due diligence, the SIX FinTech Ventures team takes a macro look at aspects including the business segment in which the startup operates and tries to gain an understanding of trends. Then from a micro perspective it examines specifics such as the startup’s finances, its personnel, its technology, and its existing contracts. It particularly scrutinizes the startup’s personnel. “The team behind a startup puts its ideas into action. A startup that has the world’s best idea but not the right team to implement it is destined to fail,” Spelmeyer says with conviction.

The final investment decision is made by the Investment Committee, which meets once per month, a rhythm that enables a quick decision-making process. A typical investment process takes six to nine months from the time of getting acquainted with the startup to the disbursement of the investment amount.

The startups that SIX FinTech Ventures invests in must exhibit the potential to grow rapidly on their own. They are companies that bear no relation to the core business of SIX or which operate in areas that either complement or are adjacent to the core business of SIX. Startups that would depend too heavily on SIX or would pose a competitive advantage for SIX are out of the question for SIX FinTech Ventures. “Cooperation with such startups necessitates stronger control beyond a minority venture capital stake. A joint venture, a strategic alliance, a majority stake, or an outright acquisition of the startup would be the better way to go in such instances,” Spelmeyer explains.

SIX supports startups through SIX FinTech Ventures and its corporate venture capital fund, but also through the F10 FinTech Incubator & Accelerator (SIX is the founder and a corporate member and main sponsor of F10). Startups in the F10 incubator are just at the beginning of their development stage, whereas the startups that SIX Fintech Ventures is involved with are already a step farther in product development or may already have initial customers and sales revenue. The collaboration with F10 provides good synergies, and many a startup alumnus of F10 ends up getting funded by SIX FinTech Ventures.

SIX FinTech Ventures invests only in startups that have the potential to grow very large and ideally become a unicorn. It isn’t known whether a business idea and the investment in it ultimately work until the exit stage of the investment process a few years later. “If you were convinced about a startup in the beginning but it went bust in the end, you can’t say that investing in it was a bad decision. Potential failure is priced into our strategy,” Spelmeyer says.