E103 [AI-Translated] Start Season 4 | AI-Dominance | VC-Fraud | Liquidations | PSOP-Plans | ZuriQ

00:00:00: The original podcast was recorded in German.

00:00:03: This podcast was translated using Artificial Intelligence, Burnrate the Venture Insider Podcast with Max Meister and Guy Gefredi.

00:00:12: Hello!

00:00:13: Welcome to Burnrate – the VC Insider podcast.

00:00:16: I'm here talking with Guy GeFredy about a startup scene with focus on venture capital.

00:00:21: Today we're officially launching into season four with episode one hundred three And some changes We are recording on Friday, August fourteenth at eight thirty in the morning.

00:00:31: Yes during summer break we worked intensively on burn rate and developed our format further.

00:00:37: The most important change, from now on there will no longer be just one episode per week but two.

00:00:43: In our Saturday episode we talk about the most important news of the week answer a question from the community and focus on a selected transaction And every Wednesday morning burn rate intelligence will be published.

00:00:54: in these episodes We discuss a current focused topic or we have a conversation with a guest from the startup or VC ecosystem.

00:01:02: Yes, Guy welcome to season four.

00:01:04: let's dive right in!

00:01:05: Yes absolutely and perhaps also a quick outreach.

00:01:09: uh...to the community here.

00:01:11: we're excited about your feedback on our new format with two episodes per week And of course enormously looking forward to Season Four again very likely.

00:01:21: Well, not forty but eighty episodes.

00:01:23: Yes and to everyone who regularly listens to Burn Rate please do leave us a rating on Spotify or Apple Podcasts.

00:01:31: that supports our podcast and helps reach even more people.

00:01:36: Today's podcast is sponsored by our partners RM Ventures & Wenger Vieli.

00:01:41: Yes Guy what are today's topics?

00:01:43: Yes!

00:01:43: In the news we have a pitch book study which shows how concentrated capital flows into AI and mega deals.

00:01:49: Then we have a TechCrunch study on the topic of fraud by startups.

00:01:53: That's very exciting too!

00:01:55: And then, The third piece of news is about the sharply risen business insolvencies in Switzerland.

00:01:59: once again In the listener question We discuss how large should a PSOP an employee participation pool be structured?

00:02:08: A Very good question that we received.

00:02:10: and the transaction Of the week one from the summer Is the mega twenty five million US dollar round From Zurich Q which was announced recently.

00:02:18: Very Good.

00:02:19: Let's start with the news, specifically this exciting pitch book study that was published and made available to us.

00:02:27: In the first half of twenty-twenty six eighty seven point five percent all invested US VC dollars went into AI mega deals.

00:02:37: That doesn't mean nothing outside is being financed anymore but in terms of valuations you can now see a pretty clear AI premium.

00:02:48: We've analyzed this.

00:02:49: For non-AI companies, the median valuation step up from round to round was one point six times.

00:02:56: That's not very much.

00:02:58: for AI companies The median was two times and it gets really extreme From series D onward.

00:03:04: there the Step Up for AI is a staggering Six points.

00:03:07: six times.

00:03:08: Wow.

00:03:09: Yes Pitchbook even speaks of the average speed-of-value creation in this phase, having risen from around one hundred nine million dollars in twenty twenty five to over a billion dollars.

00:03:20: In twenty twenty six.

00:03:21: Anthropic is one of the extreme examples.

00:03:24: The valuation is said to have increased by a factor of five point three within eight months.

00:03:30: Yes let's make a brief detour here too anthropic To their IPO which was published today Friday in the Financial Times.

00:03:37: Anthropic investors are expecting a valuation of at least two trillion dollars for the planned IPO in October, so two thousand billion US dollars.

00:03:46: That would surpass SpaceX and mark the largest IPO of all time!

00:03:50: The basis of this expectation is the enormous revenue growth... ...the annualized revenues are expected to be between one hundred and one hundred twenty billion U.S.

00:03:59: dollars by the end of twenty-twenty six.

00:04:01: That's an increase of over one thousand percent compared to the start of the year, so a massive acceleration in revenue growth that they've managed to put in.

00:04:09: One investor puts it this way at eight hundred percent growth per year.

00:04:13: even thirty times Revenue would actually be a conservative valuation in the current environment.

00:04:19: but since there is no direct publicly listed comparable In The US investors are orienting themselves To companies like Palantir or Nebius which Are currently trading At around fifty five Times Revenue.

00:04:31: Anthropic itself has not yet named an official target valuation.

00:04:35: Since the SEC filing in June, there's been a quiet period anyway.

00:04:39: so they're not allowed to say anything about the IPO.

00:04:42: Yes, impressive numbers but there's also a flip side to the coin.

00:04:46: Namely liquidity remains quite difficult.

00:04:49: There are few IPOs again But window is very selective.

00:04:53: With M&A exits things look better at first glance.

00:04:56: Acquisition volume this year stands so far at three hundred seventy five billion dollars.

00:05:01: So ten-year high!

00:05:03: But thereto results are extremely varied.

00:05:06: Armies for example was sold for seven point eight billion dollars.

00:05:10: That's above the previous valuation.

00:05:12: Brex, for example.

00:05:13: then we also reported on that here in the podcast For five point two billion dollars to capital one.

00:05:19: and they once had a valuation of twelve point three so clearly down.

00:05:22: exit valuation Yes!

00:05:24: And the secondary market shows this perhaps most brutally.

00:05:28: So companies that were last financed in twenty-twenty-five or twenty twenty six are trading roughly at their last valuation.

00:05:35: Companies whose last round was in twenty-twenty one or twenty, twenty two on the other hand are trading at median discounts of fifty four and fifty nine percent respectively.

00:05:45: So fifty four per cent for twenty one and fifty five percent Those are massive haircuts on valuations.

00:05:51: Yes, so we don't simply have a strong VC market.

00:05:55: We have a market with two speeds AI and financed winners And then all the others.

00:06:00: yes guy Are we still in?

00:06:02: A normal power law venture market?

00:06:05: or has AI amplified this principle So far by now that we actually have to speak of a completely different market.

00:06:12: Yes, well anyone who knows VC knows that power law dynamics in venture capital are always there and always apply ten investments.

00:06:21: those simply don't work.

00:06:22: Well if you invest in the early phase And then one or two become the winners and pay back The entire fund and typically also the profits along with it.

00:06:32: AI however is massively intensifying this principle right now.

00:06:37: um...the difference Is Today it's not only the later returns that are concentrated, but already capital itself and valuations.

00:06:45: When almost eighty-eight percent of dollars go into AI mega deals And a late stage AI company suddenly receives six point six times valuation step up then there is self reinforcing effect.

00:06:58: The supposed winners get even more capital can invest even more aggressively attract even more talent pull that talent away from the competition as well.

00:07:08: The risk is of course also there, that the market today's already pricing in a lot of future successes and the decisive factor is therefore not only whether AI becomes big.

00:07:21: I find actually very obvious given how much it has been used by everyone at least our environment.

00:07:29: Can enough of these companies ever generate cash flows that actually justify the valuations being paid today?

00:07:36: Yes.

00:07:37: And what does this market concretely mean for a fintech or SaaS founder who's growing today and has a solid business but simply isn't AI native,

00:07:47: yes That's probably the most uncomfortable position in the market right now Or one of the most comfortable positions if you want to put it that way.

00:07:55: You can have an objectively very good company and still find that your benchmark today is no longer the company next to you, the competitor.

00:08:05: You've listed in your comparison list but Anthropik or The Next Big AI Hyped Company And you can see that very clearly In the secondary market.

00:08:14: if your last valuation as you said Max was from twenty-twenty one Or twenty two then The market today simply pays a massive discount of fifty to sixty percent below the last valuation, even if you've actually been working very well operationally generating more revenue making more profit and that's still frustrating.

00:08:35: And for founders that means in my view valuation is today again one of the less important topics compared to finance ability cash runway burn multiple genuine unit economics and the ability to keep going without a new round if necessary.

00:08:53: That's becoming far, far more decisive today.

00:08:56: Companies that currently can't raise under strong terms often skip it... ...and don't do around at all… And accordingly have to live off their own cash flows!

00:09:05: That also changes the balance of power In twenty-twenty one.

00:09:08: The question was How high Can we push the valuation?

00:09:12: Today It is Can We even Raise Capital Without Destroying the Cap Table?

00:09:17: Yes Max You as an Investor What would you recommend now?

00:09:21: Would you try to bet even more strongly on the few obvious AI winners, or would you specifically look right now for good companies that the market is ignoring and where I

00:09:34: find the truffle hunter?

00:09:35: positioning is always an exciting one.

00:09:37: Not because i'd be betting against AI now, quite the opposite but simply because for me at The Obvious Winners a lot of perfection already seems to be priced in.

00:09:47: they're just extremely expensive right and I don't like investing in overpriced markets and companies as you know.

00:09:53: Yes, what I find interesting are companies where the operating business has improved massively since twenty-twenty one but whose valuation has come down because of the market environment.

00:10:04: I find that a very exciting combination right?

00:10:07: So if you can get a really good company there at a reasonable valuation The risk reward ratio Can be more attractive than At the twentieth AI deal Where everyone already assumes it'll become A hundred billion dollar Company.

00:10:21: On the other hand, it's clear.

00:10:22: I mean if you of course get into Anthropic at the Series D and then after the series d as we heard earlier You still get that step up.

00:10:31: And that was different before Before The Step Ups came Earlier right?

00:10:40: just before the IPO.

00:10:41: So it can still be exciting to say, okay you get in at the Series D or E or whatever and At that point The valuation is completely nuts Completely beyond.

00:10:52: And then after the IPO and at the last rounds Before the IPO an extreme amount Still happens right?

00:11:00: With the winners.

00:11:00: You see That again & Again.

00:11:02: I mean back.

00:11:02: Then i remember when Facebook now met a bought Instagram, everyone said Max Zuckerberg you've lost the plot buying instagram for around one billion.

00:11:12: Today, Instagram has an estimated value of two hundred billion right?

00:11:16: And valuation discussions are something extremely extremely difficult and You can always say in hindsight yes if only we'd known that's just incredibly challenging.

00:11:27: But the takeaway for me here is clear.

00:11:29: AI has not only changed the VC market, but polarized it very strongly.

00:11:33: so capital valuation increases and attention are concentrating on a small group of companies And at same time older startups under massive valuation pressure and liquidity remains difficult.

00:11:46: Yes!

00:11:46: For founders that means runway and fundamentals count all more and investors perhaps also exactly opposite what hype somewhat suggests.

00:11:55: If everyone's looking at the same winners, The most exciting part of the market could be where no one is looking closely right now.

00:12:02: Let's get to this second piece of news.

00:12:04: we were sent an exciting study and namely TechCrunch also covered this week, drawing on two research papers.

00:12:19: A study from Imperial College London examined cases of securities fraud against tech founders and companies.

00:12:25: between is actually rare overall.

00:12:43: The studies therefore don't say that VC-backed founders fundamentally commit fraud, but they do find some pretty interesting patterns.

00:12:51: for example startups that were founded during overheated markets with weak controls and little due diligence apparently have a nineteen percent higher probability of facing fraud allegations later.

00:13:04: particularly interesting A founder presents the company as more successful than it actually is.

00:13:14: We know that, not simply ambitious storytelling but deliberately making false statements.

00:13:19: then comes the so-called reinforced facadeing.

00:13:22: one begins to produce evidence for these stories For example fabricated customer contracts invoices or revenues and The final stage is deep facadeing.

00:13:32: Then a kind of parallel reality emerges including technology more in demos than reality.

00:13:39: We've experienced that too, but the researchers also say of course this isn't exclusively a founder problem.

00:13:45: investors can indirectly co-produce fraud when they set unrealistic growth targets That's very often the case with us, or when they neglect governance.

00:13:54: Or continue to finance founders despite early allegations.

00:13:58: one number I found particularly interesting startups with founder controlled boards were according To The University of Toronto study about twice as frequently affected by fraud As companies with investor or shared control boards.

00:14:12: and against a backdrop Of the current AI boom?

00:14:14: The question is off course.

00:14:16: are we right now Again, in exactly the kind of market environment.

00:14:20: In which the lines between fake it till you make an actual fraud blur and a particularly dangerous way?

00:14:26: Yes guy where does legitimate founder storytelling end for You?

00:14:30: And Where Does Fraud Begin Especially with startups your selling investors by definition, a future that doesn't yet exist at all.

00:14:38: Yes!

00:14:38: That's very good question and exactly the difficult boundary you're describing.

00:14:42: I mean... A startup founder.

00:14:43: they have to sell a future And a very optimistic future.

00:14:47: How is the company supposed get to fifty million in revenue within few years or one hundred million?

00:14:54: If only describe what already works today.

00:14:57: so give facts.

00:14:58: Hey we've got prototype which can do one measurement And in the future, this product will be able to do one hundred thousand measurements per second.

00:15:07: You'll probably never raise capital from a VC.

00:15:09: that's why the story has to be presented nicely and of course also very optimistically when depicting the markets.

00:15:15: For me, The Boundary therefore doesn't lie at optimism which we want feel from the founder but effectively you can say, hey we believe this market will be ten billion in size in twenty thirty five.

00:15:27: That's a thesis.

00:15:27: and Hey, we already have ten million in revenue when you actually only have two.

00:15:40: or you invent a customer contract.

00:15:41: Or you build a demo that's meant to make investors believe the product already works completely.

00:15:46: then it's no longer just storytelling but effectively for sarding.

00:15:50: and interesting thing about this facade concept I find is that fraud apparently often doesn't begin with one big lie.

00:15:56: But first you tell The Good Story Then the VCs.

00:15:59: questions come And Only then do You Have To Produce Numbers That Fit It And Documents That Underpin And at some point, during the conversations or even after the VC has already invested you then have to maintain this reality as well.

00:16:13: that perhaps also explains why some of the spectacular fraud cases look completely absurd in hindsight.

00:16:19: But presumably they simply developed step by step over the years just like for example with Theranos where no investor ever looked behind the curtain.

00:16:28: Elizabeth at the beginning very probably also genuinely thought she could pull it off.

00:16:32: and Yes, now we'll fake the measurements a little here and make that machine do a bit of wizard of ours.

00:16:38: And then she rode herself deeper into the matter so you can already imagine how fraud cases can

00:16:43: develop.".

00:16:44: Yes our bird Lizzie is still in jail isn't she?

00:16:47: She's trying to get a pardon from Trump but he probably won't do it exactly.

00:16:51: But researchers also turn their perspective on VCs themselves onto us and rightly have investors perhaps said for too long founders have to be aggressive and then been surprised when aggressive eventually became illegal.

00:17:05: Yes, you can say that venture capital has a structural conflict of interest here.

00:17:10: And yes sometimes VCs simply don't look closely enough.

00:17:14: That's really the problem.

00:17:15: I mean... The business model rewards extreme outcomes.

00:17:19: so that of us VCs A company that grows solidly twenty percent every year is Well, perhaps a great business.

00:17:25: But for VCs it's usually actually a poor investment.

00:17:28: if you grow from one million by twenty percent It takes your very long time to reach hundred million in revenue.

00:17:34: So in that sense this interplay between VC and the founding team creates a permanent pressure.

00:17:40: You have to grow faster.

00:17:41: The story has to be portrayed even bigger.

00:17:43: For the next round And the TAM too.

00:17:46: We need much higher valuation so we can show That our investors.

00:17:49: but That of course doesn't mean that an investor is responsible for the fraud just because they demand the targets.

00:17:58: I mean, their responsibility for the false statement remains with the one who makes it and, of course, the blame for the documents with the ones who produces them not with those looks at them.

00:18:08: And governance plays a very important role here.

00:18:11: according to studies The study finds companies with founder-controlled boards had about twice as many fraud cases And that at least speaks to the fact that, uh... The checks and balances you have in the board are indeed very important.

00:18:26: I also find it noteworthy.

00:18:28: according to the investigation past misconduct by founders apparently doesn't stop them from raising capital for a new start-up then writing the same story again.

00:18:38: they've managed once.

00:18:39: The industry should perhaps take another look at itself.

00:18:42: what signals actually being sent here if Failure is okay at some point means that even serious misconduct has barely any consequences, then we've confused failure culture with accountability a little bit.

00:18:56: And yes one should take a closer look at that and perhaps not always just be the kind VCs when there's a fraud case but also send founders who have committed misconduct to court.

00:19:07: Yes Max right now in The AI Boom as an investor would you build more control due diligence?

00:19:13: Even if potentially costs Deal speed.

00:19:16: Yes, perhaps just a remark on the previous statement.

00:19:19: I think this week it was very heavily discussed on social media.

00:19:22: Tim Draper The well-known American investor still has Theranos listed as one of his investments On his website and someone posted that And said It's remarkable That he stands by having made This investment because all the other investors haven't done.

00:19:38: He stands by it, right?

00:19:40: And then of course the discussion heated up.

00:19:42: Yes is that a glorification of fraud or not?

00:19:45: and That goes exactly in this direction.

00:19:47: So what now happens with a person who was punished for fraud Who perhaps even went to prison as In this case?

00:19:54: should they Then get another chance To receive money?

00:19:57: and here my answer isn't entirely clear yes.

00:20:00: so i think if a punishment has taken place or at least the confrontation a discourse about this person's behavior and that perhaps even resulted in a penalty it completely okay.

00:20:11: but this person should then be in position to found new company.

00:20:15: What I find problematic is when the misconduct isn't addressed for reputational reasons, where someone says hey we're not going to own up to this.

00:20:23: And instead one tries to sweep it under the rug and then this person goes and raises money again without people knowing they committed fraud.

00:20:30: that i find much more problematic.

00:20:32: but now that for example Elizabeth Holmes when she's served her sentence or Sam Bankman fried When He let say in brackets Is The Most Successful Investor Of The Last Ten Years when he gets out and then starts something again.

00:20:47: And for example Mark Andreessen, who very often invests in such founders as he already did with Travis Kalanick or the WeWork founder when they were supposedly reformed?

00:20:59: Can it be that one says OK!

00:21:01: One gives them another

00:21:02: chance?".

00:21:03: So... Already a very fascinating topic and we could talk about this for long time.

00:21:08: but let me now try to answer your question.

00:21:11: I'll repeat it.

00:21:12: You said As an investor, would you build in more control and due diligence even if that reduces speed?

00:21:19: Yes.

00:21:20: I think one has to distinguish here.

00:21:22: That's my clear opinion which i've always held.

00:21:24: There is a big difference between due diligence And more bureaucracy.

00:21:28: You certainly don't have To treat every seed stage company like A publicly listed corporation But when we're valuing companies at billions within months, then you can't simultaneously say they are still too young for real governance I feel.

00:21:43: Yes!

00:21:44: So the bigger the round and higher the valuation The higher should be in my view the standard for reporting, governance and independent verification right?

00:21:55: And especially with AI there's something additional.

00:21:57: It is in part extremely difficult for outsiders to assess what actually technology and whats now a demo or whats a wrapper?

00:22:06: Or this week we just looked at our case together and discussed it half an hour afterwards.

00:22:11: What was that?

00:22:12: Was that tech?

00:22:15: Was that just somehow human work in the background being sold as tech?

00:22:19: and thats incredibly difficult right now with a i because every sauce startup suddenly calls itself an AI start up even though it has nothing or little to do with AI, And here one should be critical, not because one fundamentally distrusts founders but because in an extremely fast-moving market the probability increases that everyone involved wants to believe things maybe too good to true.

00:22:47: So take away for me isn't how founders commit fraud But certain human market conditions can apparently create environment and studies show this clearly which fraud becomes more likely?

00:23:01: Particularly extreme growth expectations, for example weak governance and overheated funding markets.

00:23:08: And exactly that is the market we're in right now.

00:23:11: Good!

00:23:12: That fits with third piece of news guy namely number insolvencies has risen.

00:23:18: In first half of twenty-twenty six seven thousand four hundred ninety six companies went into insolventy.

00:23:26: That's almost fifty-five percent more than in the same period in twenty, twenty five.

00:23:31: And that is highest level since nineteen ninety four.

00:23:35: and what's the craziest thing guy?

00:23:37: No one talked about it!

00:23:38: Almost nothing was published.

00:23:40: right people talk about finance bro here in Zurich so on but fact insolvencies have risen so much.

00:23:48: we're recording forty one corporate insolventies per day.

00:23:52: wasn't worth a single line to any newspaper.

00:23:55: yes You just have to communicate the bad news during the summer slump.

00:23:59: The journalists are on holiday too, and then it doesn't get properly picked

00:24:04: up.".

00:24:05: That's a good strategy!

00:24:06: Yes if this pace continues we could land at around fifteen thousand insolvencies in twenty-twenty six.

00:24:13: last year there were just under eleven thousand nine hundred.

00:24:17: yes the headline would of course now clearly be Swiss companies are under massive pressure but its not that simple because a substantial part of the increase is connected to a change in legislation since the start of twenty-twenty five.

00:24:32: Public creditors, so for example social insurance institutions or tax authorities have to enforce outstanding claims more consistently through debt collection proceedings.

00:24:43: Dunne and Bradstreet has commented on this.

00:24:46: comparability with previous years is limited they say.

00:24:50: A portion of these companies would probably never have officially ended up in bankruptcy proceedings under the old rules.

00:24:58: Yes, nevertheless that picture is remarkably broad!

00:25:02: The most cases were in Zurich followed by Geneva and Vaude.

00:25:07: In terms of sectors it hits almost everyone particularly many cases in trades hospitality and retail... ...the numbers are exploding percentage wise in printing & publishing as well as transport.

00:25:20: Yes, so the exciting question is are we seeing a genuine economic weakness here?

00:25:26: Or Is The new legislation simply making visible which companies have been barely viable for some time anyway.

00:25:33: Yes guy!

00:25:34: Fifty-five percent more corporate insolvencies initially sounds like red alert.

00:25:39: how seriously do We really need to take this number when A change in Legislation Simultaneously explains a large part of the effect?

00:25:47: yes They are, of course already massive numbers and listening to you.

00:25:51: It sounds enormously critical for Switzerland but one should neither dramatize the numbers too much nor argue them away.

00:25:57: I mean The fifty-five percent is probably not a clean economic indicator because the rules have changed.

00:26:03: as You said when authorities today consistently initiate debt collection proceedings then companies naturally appear in the statistics that before might Have simply continued to exist somehow.

00:26:15: And exactly that i actually find interesting.

00:26:18: The legislative change doesn't create the economic weakness of these companies.

00:26:22: It only makes it visible.

00:26:24: if a company fails because tax or social insurance claims are suddenly being collected more consistently, then very probably the financial situation wasn't particularly healthy beforehand either and that's why I'd say Or would read the headline not as the Swiss economy has gotten fifty five percent worse but rather We're currently going through a consolidation process with companies that have had very little financial room to manoeuvre for some time already.

00:26:51: And the fact this effect is visible in twenty-five out of twenty six cantons shows at least it's not local or single industry problem.

00:27:00: Is this consolidation perhaps even healthy from a macroeconomic perspective?

00:27:05: That companies that have been barely surviving for years disappear from the market faster, or does one underestimate the consequences of employees and entrepreneurs.

00:27:15: It does bring a certain cleansing with it.

00:27:17: Companies can't stand on their own two feet... ...and continually with their last revenues can just barely pay wages but then no longer pay taxes.

00:27:27: They're already in a very difficult situation.

00:27:29: And accordingly, I also find they haven't really maintained their right to exist because taxes and social insurance... ...those simply have to be

00:27:37: paid.".

00:27:37: Of course it depends on how many employees are behind them.

00:27:41: It would now be interesting to see how many employers from these thousands of insolvencies.. ..have actually become unemployed?

00:27:47: How quickly can they be integrated somewhere again where perhaps there's somewhat more secure employment situations that don't wait two weeks for wages every month or bind

00:27:56: themselves?".

00:27:57: Accordingly, I do find the consolidation is okay in my view as long it doesn't affect larger companies where then an entire region has to deal with fifty one hundred or two hundred newly unemployed.

00:28:07: Yes!

00:28:07: One can say that New Rule perhaps didn't cause a crisis but shows quite clearly who had been operating without reserves.

00:28:14: This episode was presented by Ari Ventures, The Bernie's Business Angel Club.

00:28:19: Ari Venture brings ambitious Swiss startups together with experienced investors who offer more than just capital A strong network, genuine expertise and hands-on support for the decisive early steps.

00:28:33: If you want to grow as a startup or are looking as an investor for access to the most exciting early stage deals.

00:28:39: then apply for our next event at www.airaventures.ch.

00:28:45: wenger & viele your partner law firm for startups.

00:28:49: whether founding financing round or exit start ups face complex legal challenges.

00:28:54: Wenger and Viali accompanies founders at every phase of their company with tailored advice on corporate law, financing tax matters and IP protection.

00:29:07: Today's listener question comes from Steve.

00:29:17: How large should the pool sensibly be?

00:29:20: And how should it be distributed between management and

00:29:22: employees?".

00:29:23: Perhaps very briefly up front, Guy.

00:29:25: What is a PSOP?

00:29:27: Well... A P-S-O-P stands for Phantom Stock Option Plan.

00:29:32: Unlike with real shares, Employees don't normally receive equity stakes & Don't become shareholders.

00:29:39: Instead they receive virtual participation.

00:29:42: If later,

00:29:42: e.g.,

00:29:44: The company sold They are economically placed as if they had actually held a certain number of shares in the form of virtual shares.

00:29:53: And that's, of course all dependent on the specific conditions of the plan that was set up for startups.

00:30:00: it's attractive because you can give employees longer term stake in the company value without having to change shareholder structure every time and enter into the share register.

00:30:11: Yes!

00:30:12: Steve is now asking first about size.

00:30:15: What would you recommend to a startup?

00:30:17: Is that five percent, ten percent even twenty percent.

00:30:22: Yes well one often starts with the ESOP or PSOP instrument very early when the company has just been founded and after the preceding seed rounds.

00:30:32: I would orient myself toward a pool size of around ten percent.

00:30:36: That's what we see most commonly.

00:30:38: Ten percent can work well if the founding team is already largely complete, that as you do it in early phase and coming years.

00:30:45: You mainly just want to build up key people.

00:30:47: management positions of company on other hand still has to grow strongly.

00:30:51: for example a CTO or VP sales are another very important executive still have to be hired.

00:30:57: then we consider whether would not rather create a pool of twelve fifteen percent even more.

00:31:03: What one also sees in this situation is that founders or the founding team often set aside a portion of their own shares which they can then transfer to new CTO, or New Lake co-founder under specific terms agreed with investors.

00:31:16: Twenty percent?

00:31:17: Yes I wouldn't set it up automatically.

00:31:19: That's very large pool Sounds generous but economically means a correspondingly large participation and weight off employees in future company value.

00:31:31: What's decisive for me isn't just the percentage, but that one aligns.

00:31:34: The PSO P plan with a hiring plan so to speak.

00:31:38: which people do we need to hire in the coming years?

00:31:41: what participation Do We realistically need To offer them?

00:31:45: and what do we pay With equity And what could be perhaps offset with A higher salary That is from a larger financing?

00:31:52: round One also has to see Equity gets more expensive.

00:31:56: year by Year The valuation of the company rises and accordingly you perhaps don't need to give away as much PSOP in year five, As In Year One when the share is still worth much less.

00:32:08: Yes Max would you say that majority should go to management or rather broadly all employees?

00:32:14: Yes I think as broadly possible especially at a start-up.

00:32:18: i find this idea attractive That many employees as possible should participate in jointly created companies but that doesn't mean everyone gets the same participation.

00:32:28: One can, for example work with certain bands depending on level responsibility time of entry and the strategic significance of their role.

00:32:37: What I would avoid is a completely individual negotiation With every hire.

00:32:42: After three years you often find that employees with comparable roles have completely different participations.

00:32:49: A simple internal framework creates significantly more fairness here.

00:32:54: Yes, and I would also make sure that if someone isn't interested in this... ...that i wouldn't include them in a PSOP program either.

00:33:01: That's the discussion you should have with every employee because yes there are those who only come for a few years.. ..and aren't really motivated to participate economically And perhaps still important beyond pool size & distribution?

00:33:14: I'd like give three more points Steve.

00:33:16: First is vesting.

00:33:19: Typically, participations are earned over several years.

00:33:22: So the percentage is agreed upon and then you often first have a one-year cliff before you receive anything at all And then it's earned over four years so to speak until you have the full percentage in this case.

00:33:33: Second a lever regulation.

00:33:35: The plan should very clearly govern what happens when someone leaves the company.

00:33:39: Can the shares be bought back?

00:33:41: can they keep the shares or What price has paid for them?

00:33:44: that's very important.

00:33:45: and third the exit mechanism and the payout.

00:33:48: Employees should understand when their virtual participation actually has value and how it's calculated.

00:33:53: Yes, what is important?

00:33:54: Above all the relation I find – The CTO if they join company as a fifth person or late co-founder Should naturally be treated economically completely differently than employee number.

00:34:06: eighty And very important!

00:34:08: The PSOP should always be communicated to employees on fully diluted basis So not based on whats issued today but on what it means if all shares were issued.

00:34:20: And the employee must understand exactly what percentage stake, The PSOP participation actually corresponds to.

00:34:27: Yes, Max.

00:34:27: Would you actually give PSOP to every employee or who wouldn't?

00:34:30: You gave it too

00:34:31: yes I would think as broadly as possible especially at a startup.

00:34:36: i find the idea attractive that many employees should participate in the jointly created company but doesn't mean everyone gets the same participation.

00:34:47: one can work with certain bands depending on level responsibility time of entry and the strategic significance of the role.

00:34:57: What I would avoid is a completely individual negotiation with every hire.

00:35:02: after three years, you often find that employees with comparable roles have completely different participations.

00:35:09: A simple internal framework creates significantly more fairness here.

00:35:14: Yes And i also make sure if someone isn't interested in it ,I wouldn t include them.

00:35:20: That's a conversation you should have with every employee, because yes there are those who only come for few years and aren't really motivated to participate economically.

00:35:29: And perhaps still important... Beyond the pool size & distribution I'd like give three more points Steve.

00:35:35: First is vesting that very important.

00:35:38: Typically participations earned over several year So percentages agreed upon.

00:35:44: You often first had one-year cliff before receiving anything at all.

00:35:47: then it was earned in four years until you have the full percentage in this case.

00:35:53: Second, a lever regulation.

00:35:55: The plan should very clearly govern what happens when someone leaves the company.

00:35:59: Can the shares be bought back?

00:36:01: can they keep the shares or What price is paid for them?

00:36:03: that's very important.

00:36:04: and third the exit mechanism And the payout.

00:36:07: employees should understand When their virtual participation actually has value.

00:36:13: Good, let's summarize for Steve.

00:36:15: A PSOP pool of approximately ten to at most fifteen percent is a sensible starting point for many young startups.

00:36:22: Of that... ...a larger portion so roughly seventy percent can be reserved for management and other key positions while the remainder is reserved for the broader team.

00:36:31: But not simply resolving on fifteen percent across-the-board but rather calculating from the other direction.

00:36:37: Who do we want to hire in coming years?

00:36:39: What do we need to offer these people and how much pool?

00:36:43: Do We actually need for that?

00:36:45: so please determine this prospectively.

00:36:47: And don't just distribute it.

00:36:48: yes, because PSOP plans have some traps from a tax and legal perspective.

00:36:54: the specific plan should of course ultimately be structured with a lawyer or tax advisor.

00:36:59: So let's get to the transaction Of The Week.

00:37:02: This week we've picked up financing round From the hot summer period.

00:37:07: Hot is also the financing round itself.

00:37:10: Zurich Q, a Zurich-based quantum computing startup... ...is in my view one of the most exciting quantum tech cases in Europe right now.

00:37:18: Zurick Q is an ETH spin off.

00:37:21: they come directly out of research and have now in the summer closed their mega seed round of twenty five and half million US dollars.

00:37:29: ZurikQ is building quantum computers based on so called trapped ions that are charged atoms used as qubits.

00:37:37: This technology is generally considered very precise and powerful, but until now it has had one big problem – scaling.

00:37:46: And that's actually the core of the whole case.

00:37:48: Quantum computers already work today in small systems, but the leap to really large useful machines is extremely difficult and for industrial applications—for example in chemistry pharmaceuticals and materials research at some point you need not just a few dozen qubits But systems with thousands of qubits That run stably and function In an error-corrected system.

00:38:11: Yes!

00:38:11: And thats exactly where Zurich Q comes.

00:38:14: Many trapped ion systems are, simply put built one dimensionally like a chain of ions.

00:38:19: That works for smaller systems but gets increasingly complicated when you want to control more cubits and connect them with each other and manipulate them in the targeted way.

00:38:28: Zurich Q therefore pursues completely different architecture from what's been done before And that is native two-dimensional structure.

00:38:36: The ions should therefore not simply be arranged on a line but on the surface.

00:38:41: That sounds very physics-heavy at first, But the business logic behind it is relatively clear.

00:38:46: If quantum computing is ever supposed to scale It also needs an architecture that's built for scaling from the beginning.

00:38:52: And Zurich Q is trying here Not just build a better individual quantum chip To directly tackle one of central building blocks that allows the scaling barriers in quantum computing to be solved.

00:39:03: Yes, and that makes the case interesting for investors of course.

00:39:07: It's not a short-term revenue story but an infrastructure bet.

00:39:10: one has to be clear about that.

00:39:12: so if Zurich Q is right then this two d architecture could be an important building block for the development and scaling off large trapped ion quantum computers.

00:39:21: And in this market The question of architecture is decisive But currently it still open.

00:39:27: which technology platform will prevail?

00:39:29: In the long term?

00:39:30: There are various approaches and we're curious.

00:39:32: Yes, perhaps briefly on the team Pavel Hermo Tobias Sageser and Shreyans Jain developed a technology out of the ETH environment in our quantum computing study that we also completed last year at ETH.

00:39:46: We visited The Lab And it's truly impressive what these guys have built.

00:39:50: They showed us how they can effectively manipulate these ions On their two D surface Again, taken massive steps forward since then.

00:40:00: And Zurich Q is for me a typical Swiss deep tech startup.

00:40:03: they've built years of foundational research and now have a highly specialized very good team working on the commercialization of the technology through a start-up.

00:40:12: Yes!

00:40:12: And Zurick Q has already demonstrated technical progress.

00:40:16: The company has presented a demonstrator with three by three arrangement of nine individually controlled ions.

00:40:23: According to the company, that's the largest native two-dimensional arrangement of this kind.

00:40:28: That has been shown so far.

00:40:30: and what I find even more important is that the chips were manufactured with Infineon as a manufacturing partner – that's relevant signal because with Quantum hardware it no longer enough show nice experiment in lab.

00:40:44: The tech has to become industrially-producible and reproducible.

00:40:48: And if a company can show early that its architecture is fundamentally compatible with industrial chip manufacturing, then the scaling story naturally becomes more

00:40:57: credible.".

00:40:59: Yes we briefly modeled a cap table and took a look behind the scenes.

00:41:02: Zurich Q raised a pre-seed round of four point two million US dollars in early twenty twenty five And this first round was led by Founderful, and they had a number of further investors from across Europe who participated.

00:41:14: The valuation at that time according to our calculations was just over twelve million post-money... ...and now the current seed round of twenty five point five million was lead by Quantum Nation.

00:41:25: That's one of the best known specialized quantum tech investors in Europe and indeed worldwide One can say!

00:41:31: And alongside them ForwardOne, Extantia & Virgin Ventures as well.

00:41:36: existing investors participated.

00:41:38: The valuation for this large round was set at over fifty million pre-money.

00:41:43: Yes, so Zurich Q has now raised around thirty million US dollars in total.

00:41:49: For a seed phase that's relatively a lot of capital.

00:41:53: That shows clearly that quantum hardware requires different order of magnitude financing.

00:41:58: your financing labs specialized Hardware vacuum systems lasers but also chip development measurement infrastructure and Of course Also very specialized team.

00:42:11: And a company like this can scale with the small dev team without CAPEX and ASAS MVP.

00:42:18: So, capital intensity is part of model one has to say.

00:42:23: at same time round shows here very nicely that international specialist investors want give them real chance.

00:42:31: Founderful was on board early but with Quantum Nation an investor joining who knows quantum market well?

00:42:39: And that's certainly a strong signal because such investors check very carefully whether technology is only scientifically interesting or actually has the potential for a scalable platform.

00:42:51: Yes, if we zoom out a bit more... The strategic dimension is also important to you.

00:42:56: Quantum computing isn't just a technology or venture topic but an actual sovereignty and infrastructure topic.

00:43:03: The US, Europe and China are investing massively in quantum computers.

00:43:08: We address that regularly And large tech groups Are also building their own systems.

00:43:14: Yes!

00:43:14: Europe is of course now very interested In building its own Quantum competence.

00:43:19: An ETH spin-off with it's own hardware architecture Fits perfectly into the picture.

00:43:24: naturally Next step for Zurich Q Is clear Scaling the demonstrator With nine ions.

00:43:31: That's an important proof point, but the technology will only become commercially relevant when Zurich Q can show that architecture is transferable to significantly larger arrays.

00:43:42: So first hundreds of qubits then thousands and at some point they also need to have error corrected systems under control.

00:43:50: Yes for Swiss ecosystem this a very good example.

00:43:53: ETH research international investors deep tech hardware And globally relevant market.

00:44:00: That's exactly the kind of startup that shows why Switzerland can be disproportionately strong in the deep tech space.

00:44:09: So, that was it for Burnrate!

00:44:11: the VC Insider podcast.

00:44:13: If you want to support our podcast, subscribe to our newsletter and share it within your network remember we now have two episodes.

00:44:22: The Burn Rate Intelligence episode follows on Wednesday And would be delighted if you tune in.

00:44:27: Yes!

00:44:28: We wish a lovely weekend.

00:44:29: Take care and bye.