Zug, 21.04.2020

Fears of insolvency In Crypto Valley

The Zug Crypto Valley is currently in a state of emergency. Redundancies, or even insolvency are now being considered where future innovations are normally being developed on the basis of blockchain. In a survey of 203 start-ups carried out by the Swiss Blockchain Federation, around 80 % said they were very likely to go bankrupt in the next six months. In addition, more than half of the respondents had already had to lay off employees, and just over 90 percent said that redundancies would probably be necessary in the future.

"Switzerland is in danger of losing a whole decade of ‘start-up achievement’ in international competition," says Matthias Ruch, founder and CEO of CV VC and co-founder of the Swiss Blockchain Federation. Two- to three-year-old start-ups are suffering particularly from the current crisis, Ruch said. And many blockchain start-ups are in this age group, as the technology only achieved its breakthrough a few years ago.

Investment funds needed for start-ups
The big problem, according to Ruch, is that it is precisely such young start-ups who are just approaching their market entry that have fallen through the safety net of the federal measures. Because the granting of auxiliary loans is based on turnover and payroll. These are two factors that tend to be lower in start-ups than in established companies or – as in the case of sales – are even non-existent. "In addition, the start-ups are still in their financing rounds, and can no longer raise new capital because no one is investing due to the Corona crisis," adds Ruch. In the Swiss Blockchain Federation survey, 88 percent of start-ups said they could not survive the corona crisis without government assistance. Around two-thirds of start-ups that applied for Covid loans have not received them. A survey by the start-up funding organisation Venturelab comes to a similar conclusion. On their own, the 660 start-ups that took part in the survey represent around 5,710 jobs.

The Federal Council is aware of the problem, and recently said that it would consider various options for start-ups by the end of April. Matthias Ruch of the Swiss Blockchain Federation is specifically calling for an innovation fund worth CHF one billion. Experts reckon that this is the amount that start-ups in Switzerland will lose in investor funds as a result of the crisis.

But Ruch doesn't only see the negative side of things "The lockdown already has two forward-looking consequences. Firstly, we’ll never work like we did a month ago. Secondly, digitalization will receive a massive boost and will penetrate our lives even faster." New technologies such as those of start-ups are therefore needed.

Not all start-ups will suffer
A survey by our newspaper among various start-ups on whom we have reported in recent years, also shows a divided picture. Reto Kaul of the Sublimd  start-up in Cham, for example, who, together with colleagues, has developed software to relieve doctors of paperwork by means of an interactive questionnaire, says that the start of some projects has been delayed. "But we also see a positive effect, because some doctors, who have had little to do due to the ban on surgery, have used the time to get to know our products and to improve efficiency in consultation hours."

The Zug start-up Yamo, which sells organic baby food, has also experienced positive and negative effects. A strong increase in online sales, for example, the company said. Sales in the retail sector, on the other hand, have fallen. The increase in online sales "far outweighs" this loss, however, writes Yamo.

The Corona Crisis is impacting the Zug Crypto Valley.
 

Five questions for the start-up expert
Thomas Heimann, analyst at the private equity industry association Seca, is an authority on the start-up scene.

How is the current crisis affecting start-ups?
Thomas Heimann: You have to distinguish between start-ups that are already generating sales and those that work in the research and development sector. The former are more likely to feel the short-term effects, the latter probably in the medium or longer term.

In what sense?
Depending on the industry sector involved, start-ups with sales are already suffering losses, for example, because they supply restaurants or are active in the travel sector. Or they could even be benefitting from it because they offer IT support, which is in demand for the home office. Start-ups that are active in the development sector, for example in the biotech and pharmaceutical sectors, could have problems with future financing rounds, because investors are no longer so relaxed about the crisis, or they are simply less likely to take a risk. This could lead, for example, to the necessary studies not being carried out and the sustainable growth of companies being at risk.

Some venture capital funds have been set up recently that are longer-term.
But some of them have not yet completed the fundraising, and I already received feedback that some investors have backed out again and that funds have therefore not been able toe created, or are less well-funded financially. The funds that have already been completed will, however, be able to somewhat absorb the problem.

Will the crisis have an effect the number of start-ups?
I assume this, because who wants to take the risk of not finding investors? Overall, start-ups with new, untested technologies and uncertain profit prospects will find it harder than those with established business models and business histories that are more predictable.

What should policymakers do in order to adequately help start-ups?
The Federal Council has reacted very pragmatically and unbureaucratically with the short-term bridging aids. However, it has now found that the start-ups cannot benefit sufficiently from this in the vast majority of cases, and is rethinking the design. In addition, the promotion of the innovation and financing ecosystem should also include a medium- to long-term perspective, as there will be a time delay before the effects of the crisis will usually be felt by start-ups.