Comment France is back

Why there’s never been a better time to invest in French VC

There has never been a better time to build a fast-growing business in France. While some may find this claim surprising, rarely have so many ingredients for success converged.

This climate is partly attributable to the research tax credit – which, it has to be said, has been highly effective – and the recent tax reforms negotiated with the French government by the group of web entrepreneurs calling themselves ‘Les Pigeons’ (the ‘fall guys’, or ‘suckers’). The government’s belated acknowledgement that start-ups – which are inherently more fragile than other businesses – need a stable economic environment has also helped.

But the main drivers are the entrepreneurs themselves and the investors who have backed them over the years – like the FCPI (retail) innovation funds, which continued to invest during the crisis even as more traditional funding sources fell short.

The past 10 years have seen a number of remarkable French entrepreneur success stories. Free, Meetic and Vente Privée, to name just a few, are living proof that it’s possible to start, build and grow a profitable business in France. And this can be mutually beneficial: as well as providing benchmarks for other owners of fast-growing companies, successful entrepreneurs tend to nurture the entire ecosystem via their own personal investment funds. Take Criteo’s remarkable Nasdaq success story: some of the capital gains reaped by shareholders, whether managers or investors, will be reinvested in other companies.

Together with the launch of Bpifrance’s seed money fund (a French state-backed vehicle), the emergence of these serial entrepreneurs has helped bridge the start-up equity financing gap in France. Start-up accelerators, a trend that originated in the United States, have also taken on a new dimension, like the Family, which are supporting start-ups in building up a solid structure, drafting business plans, and launching projects, in exchange for a small stake in their equity.

Indeed, there has also never been so much capital available in France to finance the growth of post start-up businesses. The most recent financing rounds launched by Idinvest and other venture capital funds combine over €600 million in capital available for investment over the next three or four years – a reservoir that does not exist anywhere else in continental Europe. And an entrepreneurial spirit – which was nowhere to be seen a decade ago – is now flourishing in French business and engineering schools, who are now developing curricula along these lines.

Finally, the traditionally highly volatile market is healthier: post-bubble funds from the 2000s have all been liquidated and opportunistic or less successful investment teams have disappeared. A chapter has been closed and confidence has returned.

Consequently, LP sentiment towards the asset class is regaining its shine. More and more institutional investors are taking a fresh look at venture, buoyed by the first signs that the European economy has turned a corner – and the evidence from companies like Criteo, Spotify, King and Supercell that European start-ups can indeed go global and generate multi-billion dollar returns (Criteo alone, for example, is a multiple fund returner).

However, other businesses will only follow in Criteo’s footsteps if some of the factors currently holding them back, such as our labour laws and administrative complexities, are removed. Today, the complexity of the Labour Code, the high cost of social charges, the lack of job flexibility and the still high corporate taxes seriously hinder business development – particularly at the crucial stage when a company moves from being a start-up to a substantial small and medium-sized business. But the government seems to be willing to address these predicaments; it has recently launched a ‘Simplification Project’ to help streamline business life, for example.

At the same time, the country’s larger corporations must learn to better understand, support and mentor these businesses. This can also provide them with an excellent opportunity to benefit from these unique growth prospects.

With 90 start-ups in the last Deloitte Technology Fast 500, France ranked as the top European nation, ahead of the UK. German and Nordic companies are currently looking for financing in France – a clear signal that the ecosystem and the venture capital industry are both highly attractive. All that remains now is for France to improve its communications – because ultimately, its image may now be its main problem.

Matthieu Baret is a partner at Idinvest Partners, a Paris-based private equity group that specialises in the small and mid-market segments