The Swiss Innovation Paradox

The Swiss Innovation Paradox

7 February, 2019

A plethora of studies and reports declare Switzerland to be a leading force globally for innovation and competitiveness. This should, in theory, provide fertile ground for the development of exciting new companies and for the acceleration of their growth into so-called unicorns and global players. However, this underlying strength does not seem to fully translate into horsepower on the ground in the startup ecosystem around our country – thereby constituting the Swiss Innovation Paradox. This shows that great framework conditions may not suffice to foster high-performing startups and that innovation is also a mindset that needs to be promoted throughout society.

Switzerland is number one

Every year since 2011, Switzerland was the world’s most innovative country according to the Global Innovation Index (GII) ranking, which is annually published by Cornell, INSEAD and the World Intellectual Property Organization (WIPO). The latter is also linked to one of Switzerland’s main strengths in these rankings, namely the rate of patents filed. While these rankings are strongly supported by the quality of its universities, their research, as well as the high corporate R&D spending, they also underline the importance of what one could call institutionalized – and incremental – innovation for Switzerland. One could oppose it to entrepreneurial and disruptive innovation, which more often than not is brought on by startups and entrepreneurs. Unfortunately, disruptive innovation is often coupled with unrest, a state that is not consistent with the paramount condition of Switzerland’s succes: stability.

The entrepreneurial spirit

Switzerland certainly does not lack the entrepreneurial spirit. In fact, the country’s economy was built by and continues to thrive thanks to small and medium enterprises (SME), which make up 99.7% of Swiss companies and employ close to 68% of its workforce. In 2016, over 39,000 new companies were founded in Switzerland, 300 thereof are what we call startups. Unbeknownst to the large public, many of these SMEs are extremely successful and hidden world leaders in their sectors, with resilient businesses built on the highest standards of service or the latest technological advances, which are often developed in-house.

The culture of failure – or lack thereof

This strong entrepreneurial and business savvy tradition tends to be counterbalanced by our notorious aversion to risk. In fact, the country’s institutions and social structures even encourage conservative and risk-averse behaviours. It can be argued that the success of Switzerland’s institutions, its political system and its economy in general, was built on stability and conservative decision-making. However, this may also be the single biggest obstacle to the development of a true venture ecosystem, representative of the country’s innovation power.
Deloitte’s 2018 study Forget Fail Fast states “true innovation can often require permission to fail; otherwise, innovators may feel the risks of trying something truly new are simply too high” . This does not mean, that the country should start encouraging failure, but failure should be permitted.
The stigma of failure is strongly correlated to the aforementioned risk aversion and it lingers in Swiss mentalities. This prevents many young entrepreneurs from taking a leap of faith, when deciding on founding a new venture, or an investor from listening to his gut feeling, when making the decision to inject significant capital into a new venture.

Growing a start-up and funding it in a risk-averse culture

Relative to other countries, Swiss start-ups typically grow at a much slower rate. This could be explained by the fact that Swiss startups often develop very complex products for highly specialized applications, thus needing much deeper research than a typical internet startup company. 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.
There have been dramatic improvements in the Swiss startup financing ecosystem in the past years. This contributed to reach a record CHF 1.24 billion invested into Swiss start-ups in 2018. However, a high percentage of invested capital still originates mainly from foreign sources (over 70% in 2017). While seed funding has increased healthily, it remains very challenging for startups to find growth capital that could be brought by institutional grade investors and that would allow them to reach the next level. As of February 2019, the new CHF 500 million Swiss Entrepreneur Fund, supported by former Federal Councillor Schneider-Ammann, was launched. This is a great step forward in strengthening funding possibilities for high-potential startups.

Start-Up Nation Switzerland

As innovation world champion, Switzerland’s venture ecosystem is still in its early stages and has a lot of ground to cover in order to catch up with global venture hubs. However, all the ingredients are available.
Fostering a venture mindset, along with a bit more risk-appetite from our investment community and a more general acceptance of failure as a learning opportunity, could unleash our nation’s true potential to create a number of unicorns and decacorns. We are not advocating reneging our commitment to stability and well thought-out decision-making. Much more, the system should evolve to support young entrepreneurs in taking calculated risks and to seize unique opportunities, when they arise.
In the current economic setting of low interest rates, all institutional investors seek attractive returns. If 0.5% of all assets managed by our pension funds would be invested in venture, Swiss investors would already bring close to CHF 4 billion to the table. Perhaps a more systematic allocation of capital towards startups should be implemented, in addition to initiatives such as the Swiss Entrepreneur Fund. A stronger funding environment could also attract potential foreign unicorns and encourage them to establish their headquarters in the alpine nation.
Switzerland could further grow from Number One in institutional and academic innovation and become a true innovation powerhouse and a hub for the development of new global business models. The country has historically been a trailblazer and followed its own path, thinking out-of-the-box in comparison to other nations. It’s time we think outside of our own box.

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