Fund of the Year: Swisscom Digital Transformation Fund

Founded in 2005 by recurring GCV Powerlist nominee Dominique Mégret, Swisscom Ventures is the corporate venture arm of Switzerland-based IT and telecoms group Swisscom – a government majority-owned company with a market cap of $24.6bn and a Forbes Top Regarded Company 2018.

Originally focused on strategic impact for its corporate parent, the entity invests across core telecoms and IT services, as well as in new technology with a potential to transform the company’s activity. More recently, Swisscom Ventures also took an interest in emerging technologies such as digital health, the internet of things (IoT), artificial intelligence, wearables and fintech. In 2016, the unit created a Sfr10m ($10m) dedicated fintech fund to provide early-stage and series A financing for startups operating in the areas of collaborative economy, access and identification, blockchain financial applications and digitisation of small and medium-sized enterprises. In addition to that, Swisscom promotes fintech startups through initiatives such as Kickstart Fintech Accelerator, DigitalZurich2025 or Swisscom Startup Challenge.

Swisscom Ventures manages two main funds. Its domestic Early Stage Fund backs startups in seed to series A stages. It usually starts with small entry tickets below Sfr1m and follows with additional investment of up to Sfr5m. Covering areas as diverse as digital media and cleantech, the fund aims to encourage the emergence of Swiss technology leaders by leveraging the country’s innovation centres and providing funding exclusively to Swiss companies.

The International Fund, invests in information and communication companies at every stage of development. Entry tickets usually vary between $500,000 and $1m and can be increased to $5m in subsequent rounds. With this vehicle, Swisscom Ventures typically co-invests alongside large VC firms able to finance a global market rollout. As of 2016, the unit had completed around 20 deals overseas, mostly in Silicon Valley.

Following an evergreen model, through which returns from deals are reinvested in new portfolio companies, the unit has a total investment capacity of Sfr10m to Sfr20m a year, according to Mégret. This amount is, however, likely to increase each year as more and more companies are sold by the unit. Between 2016 and 2018, Swisscom Ventures completed a dozen exits in a variety of sectors, including infrastructure and cloud, the internet of things, fintech, security and enterprise solutions.

Byy 2018, the venture arm had invested a total of $100m in about 50 startups since inception and closed around 20 exits. One of the most recent was the sale of Switzerland-based business software provider Bexio for a reported $110m last year. Some of the unit’s most recent investments include an $11m series B round co-led with private equity and VC firm ETF Partners for Swiss drone developer Flyability, and a $5m series A round for Bangalore-based cloud infrastructure startup Rtbrick, co-led with Deutsche Telekom Capital Partners.

A new addition to the Swisscom Ventures family of funds was made last year as the unit launched the Digital Transformation Fund – the first of its vehicles open to external backers. The parent company provided about a quarter of the total $199m raised for the oversubscribed fund, while the rest came from institutional investors. Targeting early to late-stage companies, the fund expects half its dealflow to arise from Switzerland and will also seek opportunities in the US, Europe and Israel. The vehicle emerged amid greater activity in Switzerland, as almost $940m was invested in local startups in 2017 – 3% more than the previous year. According to the Swiss Private Equity & Corporate Finance Association, local pension funds currently manage more than $800bn of assets, of which roughly 1.5% are invested in private equity and venture capital.

Perhaps peculiar to Swisscom’s case, as opposed to CVC arms spun out of their parent company after raising external money, Swisscom Ventures continued to operate as an in-house unit, maintaining a strategic traction with its corporate parent. Speaking to GCV in a past interview, Mégret said: “When we first started 10 years ago, it was all about strategic value creation, but with time, financial performance becomes more tangible. That is when you need to deliver financial value to remain credible. It then becomes a balancing act between the financial and strategic dimensions, between more or less mature businesses, and between core business areas like telecoms and IT and longer-term adjacent ones.”

He added: “Swisscom Ventures is a startup within a corporation. We see ourselves as a profit centre and try to achieve maximal impact with minimal team costs. This is key to being independent-thinking and long-term sustainable.”

As industry peers start to develop alternative models to leverage corporate cash with financial investors, finding the right mix of financial and strategic returns should indeed be a priority for the Swiss group.

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