The government spoke out in favor of a state innovation fund for the first time on Wednesday. This should facilitate expansion investments by innovative start-ups and strengthen the business location. But tricky questions are still open.
A new state fund is to help innovative start-ups.
The state should fix it. In recent years, that has increasingly been the slogan in what was once relatively liberal Switzerland. The Federal Council provided another indication of the changed political wind direction on Wednesday: during its debate on the idea of a state innovation fund for the promotion of innovative start-ups. So far, the government had rejected such ideas – not least because they did not see any failure in the private capital market.
Also the latest ordered by the federal government study by the Basel Institute for Economic Studies confirmed the earlier assessment: There is no evidence of market failure, which is why there is no necessary basis for market intervention by means of a state innovation fund from an economic point of view. And yet the government now wants a state boost. She made a fundamental decision in favor of creating an innovation fund.
Focus on buzzwords
The matter was controversial. But the Federal Council followed the request of Economics Minister Guy Parmelin, who spoke out in favor of this state intervention despite considerable skepticism in his department. In principle, the fund should be open to all sectors; at least at the legal level there should be no restriction. However, the Federal Council saw it a little more narrowly and gave a political direction: The fund should focus on the areas of “decarbonization” and “digitization” – whatever these words may mean exactly. The first term probably introduces the new all-purpose weapon called climate policy into the debate about a state innovation fund. The term “digitization” seems more diffuse and could be interpreted so broadly that in the end many young companies beyond country inns can be classified under it.
According to the Federal Council, the focus of the envisaged fund should not be the financing of the first million francs for start-ups, since there are, according to widespread assessment, sufficient private sources for this. Instead, the focus is on second, third or further rounds of financing for young companies – to put it bluntly, investments from the second to the twentieth or fiftieth million.
Answer to Europe problem
According to federal information, the government decision should not be seen as identifying a market failure; Rather, it is about strengthening the business location and thus compensating for deteriorations on other fronts, such as taxes. A key factor behind the decision is the ongoing conflict with the EU. Switzerland currently does not have full access to “Horizon”, the EU framework program for research and innovation. This is causing a great deal of unrest in the Swiss research community.
The State Secretariat for Education, Research and Innovation published the results of a survey of almost 900 researchers, companies and other institutions concerned on Tuesday announced. According to the federal report, many respondents reported a deterioration in the situation – in particular due to the restriction of access to funding opportunities and the dismantling of international networks.
Various representatives of the innovation scene had been campaigning for a state boost in financing for start-ups for some time. A core message behind such demands: “The market alone will not fix it.” Such a message from this quarter may come as a surprise, considering that it comes from fundamentally strongly market-oriented exponents.
Such exponents often justify their concerns not least with the desire for “equally long tables”. According to the motto: The other countries also have state subsidy programs, so Switzerland has to do something like that if it doesn’t want to fall behind. According to his department’s discussion paper, this was also a key argument for Economics Minister Parmelin in favor of a state boost in Switzerland.
Only in midfield
When it comes to financing young companies, Switzerland is no longer a desert. According to the latest Swiss venture capital report a good 3 billion Swiss francs flowed into innovative start-ups in 2021. The total investment for the projects recorded was more than three times as high as in 2017 and about seven times as high as in 2012. In an international comparison, however, the Swiss investment totals for innovative young companies per capita and in terms of the size of the overall economy are only in the middle (cf. Graphic). That is rather modest for an island of prosperity that, according to its self-declared claim, wants to defend its top position in terms of innovation. The economic department had set a target of 1 to 2 percent of gross domestic product annually. According to the Basel accompanying study, from November 2020 to October 2021 it was only 0.4 percent; Front runner Israel achieved a good 2 percent.
The hairy details
After the government decision on Wednesday, things are ahead of the game: the Federal Council will come up with a fund project. However, the concrete form of the fund is still open and will be determined in stages. One of the sticking points here: should the fund make direct investments in companies or act as a fund of funds that invests in a bouquet of specialized venture capital funds? The focus is on the idea of indirect investments via other funds.
Another key question: Who should manage the fund? The Federal Council has not yet decided on this either. Apparently, however, there is no plan for the federal government to build up its own fund management capacities. It is conceivable, for example, to issue an administrative mandate to the European Investment Fund or to a third party. With regard to ownership, it is quite possible that, in the end, other institutions, including private individuals, will be involved in addition to the federal government.
One published on Wednesday companion study by the Zurich research office Swiss Economics has examined various models, but ultimately did not make any clear recommendations. The paper cites an ideal-typical example from abroad for each of four models: a Dutch fund of funds that commissioned the European Investment Fund to manage it; a Belgian fund of funds managed by three (partial) government organisations; a German fund that invests directly in young companies together with private investors; and a British fund, which is managed by a subsidiary of a state bank and invests directly in companies with a focus on climate neutrality and pharmaceuticals.
The crucial question is also wide open: How big should this fund be – and how is it to be financed? According to observers, it would have to be billions if the fund is to have a clearly noticeable effect. However, not the entire amount has to come from the federal government. A supporter of the fund is optimistic that the federal project will also attract private investors. Based on the research literature, the accompanying study by the Basel Institute for Economic Studies was rather skeptical.
2025 at the earliest
The political mills in Bern grind slowly in normal operation. According to one observer, the planned fund should not start investing until 2025 at the earliest. In the first stage after the directional decision on Wednesday, the Economics Department must submit the key figures of the planned innovation fund and also possible financing options by the end of January 2023.
The project probably has a chance in parliament: the terms “start-up companies” and “innovation” have positive connotations from left to right, the call for state aid is in keeping with the spirit of the times, the inclusion of the climate issue creates additional mood on the left, and even among the liberals the matter is no longer taboo. This week, the Schwyz FDP national councilor and former party leader Petra Gössi, together with the St.Gallen professor Dietmar Grichnik, published a guest article in the NZZ, which spoke out in favor of a state innovation fund. According to the text, such a fund could help keep innovative minds in the country and strengthen the innovation ecosystem. The text reflects a fear that is often heard that high-growth companies are moving abroad for lack of domestic investors.
The fact that the market should fix it falls short, said Gössi on request. The text reflects her personal opinion and not a party opinion. The National Councilor indicated that Switzerland’s ongoing conflict with the EU was a key factor behind her deliberations.
ETH Lausanne is expanding massively
fum. ETH Lausanne (EPFL) is already characterized by a particularly lively start-up scene: According to the latest report by the ETH Board, 32 spin-offs were created in Lausanne in 2021 (compared to 25 at ETH Zurich, which has more resources). Now this momentum is to be increased even more: as the EPFL announced on Monday, the area of the “Innovation Park”, which has existed for thirty years and is now reaching the limits of its capacity, is to be doubled. According to the company, the new building project called “Ecotope” will become “a place where authorities, researchers, investors, industrialists, entrepreneurs, students and citizens come together and engage in constant dialogue”. An architectural competition was completed in early June, and construction is scheduled to begin in summer 2023.