Richard, your former employer Glencore went public in 2011 in a USD 11 billion IPO. Soon after that, you quit the trading giant and became one of Verve’s first employees. What was your motivation for this move?
After the IPO, I wasn’t really looking for a job. I was more interested in finding a new hobby, so to say. Startups have always intrigued me. Luckily, I met an acquaintance in a Migros supermarket and we chatted a bit. She told me that she was about to invest in Verve, and I decided to do so as well. A couple of years later when I met the founders, they told me that they were looking for a part-time CFO and so I said yes to that proposal. At first, I worked about a week every month, but this soon got more as I started to do bookkeeping and salaries later. I spent my life trying to get rid of payroll work, but somehow this always came back to me.

How different was Verve Ventures at this time from Glencore?
At Glencore, there were about 250 people in Baar, but if you count all the other locations and the workers worldwide you get to more than 50’000 people. As a trading company, the turnover is calculated in the billions of dollars, and as a senior accountant, you wouldn’t give much thought to problems under a million. Verve at that time was very different, as befits a startup we worked in a tumbled down villa with minimal infrastructure and our team was just six people.

Sergej, you left another very successful big company, Partners Group, to join Verve Ventures. Why did you want a change?
I’ve always been fascinated by technology and innovation. At Partners Group, I was managing a portfolio of private companies in the real estate sector and was also a board member of several of them. In this role, I was in contact with numerous tech start-ups pitching their services. Even though Partners Group still has a very entrepreneurial spirit, with well over 1,000 employees it has put in place stricter processes than in its early days. At Verve, I can drive changes faster than before, and I want to contribute to the fast growth trajectory Verve is on.

“I want to contribute to the fast growth trajectory Verve is on.”

Let’s go back to the early days of Verve Ventures once more. Richard, what has changed since then?
Verve Ventures was built on the idea of democratizing startup investments. The goal was to allow investors to participate in financing rounds with small tickets. In the first years, if we invested CHF 200’000, that was a big round for us. Now we can raise up to several million in a single round and we have managed to attract a lot more high net worth investors. We’ve evolved from a bare-bone matchmaking platform to a full-stack service provider that offers a complete set of services associated with startup investing. For me, this evolution is indicative of how flexible the team was and still is.

Before we dive deeper into the offering: Was there a cultural change as well?
I think that the company culture of everyone speaking to everyone and people going to have drinks after work is pretty much still alive, under normal circumstances. Maybe those who got married and have kids have calmed down a bit, but that’s pretty normal, right? And even if there is more structure than in the early days, for example, we have team leads now, they still function very much by the respect they earn and not because of their position.

Let’s talk about something that hasn’t changed either, namely the offering that allows investors to choose when they want to invest on a deal-by-deal basis. How has that model held up in your opinion, Sergej?
Being able to choose which startups to invest in is a great value proposition for investors. It compares well to a fund model where you don’t have a say over the selection of startups. The flip side of this is, of course, that they have to choose themselves and base their own investment decision on the materials we provide. In general, investors trust Verve to present only deals that are worth investing in. The challenge of the deal by deal model for us is that we have to manage a very large amount of single investment contracts efficiently. In 2020 there were more than 1400 single investments to handle. This would be impossible without the infrastructure our IT team has built over the years in-house. Lastly, there is a common denominator between top-notch funds and what we do. We provide value-added services to the startups after the investment has taken place, such as intros to clients, help with hiring, facilitating partnerships.

Richard, can you describe what led to the establishment of our own fiduciary and why this is relevant for startups?
We started pooling investors in an outsourced fiduciary structure in 2016. Startups don’t want a large share register with a lot of small individual investors, because it creates practical problems for them. This was also the point where we started to evolve from a pure broker of investment opportunities to the management of investors’ holdings and a representation of their interests towards the startups. We then built our own fiduciary structure to make the administrative process more efficient. It’s a simple idea in theory, but quite demanding in practice. We had to pass the necessary regulation and make sure the processes are up to the exacting standards of Swiss regulation, in particular to the know-your-customer (KYC) and anti-money-laundering (AML) rules. These are all challenges inherent to the deal-by-deal model, challenges a fund doesn’t have.

What about the information rights of the investors?
Richard: In the early days, investors received the information directly from the startups, but often this was just a team picture with a few sentences every now and then. Today, the information startups provide is much more structured. We distribute the information to the investors and if necessary, push the startups to improve the quality of reporting. You shouldn’t just take the money and then leave investors guessing how you are doing.

How do investors know what their startup shares are worth?
Sergej: Compared to later-stage private equity investments, the valuation of startup shares is a lot trickier. The first starting point to assess the value is usually recent transactions, such as the closing of a financing round. But sometimes you can’t take this price just at face value, you have to read the fine print if there are different share classes and what the differences between them are. Also, you need to account for the time that has elapsed since the last transaction and the evolution of the business since then. At a later stage, when startups start to have a more stable revenue base conventional valuation methods (e.g. market multiples, discounted cash flow) can be used. Internally, we are putting in place a holistic evaluation framework that doesn’t just inform us about the valuations of the startups but also where we can add value by helping a startup to reach important milestones.

“Even if you have very clever founders and a brilliant product, this is by no means a guarantee the project will fly.”

How attractive are startup investments from a financial perspective?
Sergej: If this is right for you depends mainly on your risk appetite. Historical data has generally shown an outperformance of private markets versus public markets, but the flip side of this is the elevated risk associated with this asset class. I’d say it’s a good way of adding an interesting diversification element to your portfolio, but you shouldn’t just randomly invest in the first startup that comes your way. Our model with carefully selected startups that are backed by reputable co-investors is no guarantee for success, but it makes sure you steer clear of costly stupid mistakes.

Richard: Still, it’s incredibly difficult to identify which startup will eventually make it. Even if you have very clever founders and a brilliant product, this is by no means a guarantee the project will fly. Markets can change, the competition can evolve rapidly, the capital market environment can deteriorate. A good company can still be a bad investment if the valuation is too high to begin with, and reflects only the good salesmanship and optimism of the founders. In every financing round, you need a professional investor with a big enough stake that dampens the founders’ enthusiasm and gives them pushback on the terms. Otherwise, you end up investing at phantasy valuations that make it difficult to raise follow-on rounds. Our investment team has walked away from very promising startups because the valuation was too frothy. Our investors might never know about the many deals that didn’t happen, but it’s part of a strict due diligence process.

What will the future bring for Verve Ventures?
Richard: I think we have a good chance to establish ourselves across Europe, while the competition in the UK is fierce. There is certainly a lot of capital that wants to invest in private markets from private individuals, family offices and institutional investors, which has led to a staggering amount of valuable companies staying private for much longer than they used to be. This, of course, raises other questions, such as why this asset class is usually only available to the rich, or qualified investors. In Switzerland, if you have CHF 500’000 of liquid assets and investment experience, you are a qualified investor and can invest all your money in startups, but if you have CHF 450’000, you can’t invest a cent. The only way the broad population could participate in the most promising startups is through their pension funds, but most of them don’t invest in venture capital. Interestingly, we have invested alongside pension funds from abroad.

Sergej: Deal-by-deal access will stay the backbone of our business, and we’ll continue the growth trajectory, particularly through a push to internationalize. In the first quarter of 2021, more than half of the money we invested was in deals outside Switzerland. As a second element, we’ll expand our product offering to different kinds of diversified products. We will start to bundle startup investments around topics or regions and make them available through financial products that are attractive to institutional and private investors alike. Thirdly, the staggering number of single investments we have to process keeps on growing. To handle it, and to assure a neat investor experience at the same time, we’ll continue to invest in our digital infrastructure and the way we keep our investors up to date. These investments cover not just the investment process itself, but also the reporting, portfolio management and value creation activities that come after the investment has taken place.