Michael Bornhaeusser, a software entrepreneur, in an essay describes how he became a venture capitalist, how he goes about to find «his» companies and the role of Sallfort Privatbank.

By Michael Bornhaeusser, Co-Owner of Sallfort Privatbank and Head of Private Equity

Large-scale IPOs such as Snap Inc.’s in the U.S. are top financial news – and information that also wets the appetite in Switzerland. How do you find such companies? And how do you invest in these firms before an eventual «exit»?

Before going into more detail, allow me to present myself. I am not your typical financial expert who normally gets portrayed in this space, but an Internet and software entrepreneur with more than 20 years of experience.

Switching Sides

In 1994, I founded one of Switzerland’s first Internet companies and took it to the stock exchange following a merger with a German Internet startup (MMK/Pixelpark). When the bubble burst I had to start anew and launched a software company for mobile streaming technologies for the media. Later, I acquired a company providing a content platform and developed it further.

Both companies had a global client base. After selling both, I decided to switch to the investor’s side – to the «dark side» as it is known in the tech industry. I quickly learned that my «club deal model» for venture capital was popular with co-investors; but also that the regulator applies stringent rules for such solutions.

That’s why I took a stake in Switzerland’s Sallfort Privatbank – which made me a banker. Admittedly, after having changed career and only to a certain degree as a financial expert. That’s why I focus mostly on «my» business, venture capital in tech firms.

Average Return of 300 Percent

Since launching our Club Deals at Sallfort in 2012, we invested in nine companies in 14 rounds. The focus was on growth firms with existing revenues, called «later stage» in the business lingo. Thus we already achieved four «exits» – with an average return of about 300 percent. Several times, we were lead investors and I took a seat on the board of directors of the companies. That way we took an active approach with our investments.

Now back to my topic: as much as 80 percent of the angle investments in Swiss tech firms has to be written off. I often get asked how I evaluate our investments and what parameters for the decision-making we apply.

Competence Is a Must

The most important factor is competence. It is useful to have been through the startup phase of a tech firm at least once, ideally from the very beginning right to the «exit». Each industry has its own laws and conditions. In the world of tech, factors such as innovation, pace of development, international marketing and distribution as well as sometimes most unorthodox methods by software developers are decisive factors to be successful.

A basic knowledge of software technology is also of essence, not least to prevent developers from doing what they want with management (and shareholders). A risk not to be underestimated.

No Thanks to Outsiders

So, when startup entrepreneurs from the energy or biotech sector approach me about an investment, I have to say no, with regret. I’m not a biologist, or a power-station engineer or medical doctor, which is why I simply have no clue about these industries and the technologies used.

Swiss venture capitalists tend to invest in Switzerland. After all, we have a common language, headquarters are close by and we have some of the best universities in the world with ETH Zurich and EPFL in Lausanne.

Unfortunately, more than 90 percent of Swiss startups with an «exit» – if one is achieved – are being sold for an average of 20 million Swiss francs. That is very far off the valuations achieved in the U.S. So why not go where venture capital is really ‘happening’? To Silicon Valley, Los Angeles, Santa Monica or at least to London?

Friends in the Right Places

The answer is simple: getting access to these places is rather difficult. These venture-capital markets are «overcrowded». Attractive startups get more offers for money than they need. Still, in those places there are more exits a month than in the past five years in Switzerland taken together, and at far higher valuations.

At Sallfort, we placed 70 percent of our investments on the U.S. West Coast. Admittedly, I also struck some luck. Through my software firms I got to know a lot of representatives of reputed venture-capital firms and when I had sold my last company, I was asked whether I wanted to join the board of Ubiquisys telecommunications firm.

The very big of the industry already had invested in that company and were on the board: Accel Partner (known from Facebook and Whatsapp), Advent Ventures (Yelp), Atlas Ventures, you name it. I obviously accepted the offer to become a board member and invested at the same time. Through my colleagues on the board I got access to a highly interesting flow of deals in the best venture-capital market of the world, in Silicon Valley and San Francisco.

It obviously doesn’t happen over night. The building of a trusted network in Silicon Valley requires time, many trips to the region and an active approach to the tasks of a board member, with the founders and CEOs of the startups.

Keeping Your Risk as Low as Possible

My first step into the exclusive circle dates back to 2010, and now, seven years later, I can easily confirm that I have «arrived» on the West Coast. We have partners such as Google Ventures, Sequoia, August Capital, US Venture Partners, Morgan Stanley and many others. It helps to reach out to the best firms, in Silicon Valley and in other parts, for instance in Latin America, our latest venture-capital region, where we have been active for the past two years.

When you take stakes together with other investors, you try to keep your risk as low as possible. In the venture-capital business this means concentrating on mid- and late-stage investments. Startups that are at an early stage and don’t yet generate any revenues, in other words companies looking for early-stage investors, often have a low valuation, but the risk is pretty high that these firms won’t survive.

If a company generates earnings and has a corresponding growth rate, the risk declines because there is a certain guarantee that there are customers willing to pay for its products and services. Of course, the valuation of the company will increase.

Apart from concentrating on software and Internet technologies, digital media and E-services, segments that I knew from my operative work as a founder and CEO of my own companies, our focus was on mid- to late-stage investments from the very beginning.

Lower Risk, Smaller Upside

As I mentioned before, the advantage is a lower risk through a proof of concept thanks to the earnings generated – in our case at least five to ten million dollars annually plus a shorter investment horizon. We assume a period of three to a maximum of five years.

The disadvantages are the higher valuation and a much more difficult access to these investments, because the venture-capital firms which invest at an early state will continue financing the successful firms and will only allow new investors if they provide not just new capital but also further services such as support of distribution, product development or strategy support.

Which means that I have to accept a higher valuation and a smaller «upside». And in addition to providing capital, I have to actively support the company.

  • In the second part of Michael Bornhaeusser's essay: «How to invest in a company – and how not to».

Opening Up to Institutional Investors

Investments together with Sallfort-shareholders so far were restricted to private clients of Sallfort Privatbank. Through its network with other venture-capital investors, especially in the U.S. and the U.K., the company is receiving more and more interesting investment offers. Sallfort therefore has access to bigger opportunities and is able to offer co-investments to institutional investors. Sallfort has developed a program for pension funds, banks and asset managers and has been able to conclude first partnership agreements.

Sallfort Privatbank is based in Basel and Zurich. It combines the entrepreneurial tradition gained by nine generations of the Barth family with innovation in asset management. The company emerged through a combination of the Sallfort AG, Basel and P&P Private Bank AG, Zurich. Johannes T. Barth is the chief executive officer.

Michael Bornhaeusser is a partner and managing director at Sallfort Privatbank. He manages the private equity, products and services division.