Is French Tech on the Rise?
Ecosystem - Startup Investment - Public Money - Large Exits - Silicon Valley - European Union
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Ten years ago, the startup ecosystem in continental Europe was small. The one in France was almost non-existent. In France, entrepreneurship was far less considered than working for the government or big corporations. Realizing the costly mistake of having missed the internet revolution, the French government launched a plan to become a startup nation. The label French Tech was created in 2013, and public investments followed in startups. France has invested a lot in innovation programs in the past ten years. President Nicolas Sarkozy invested $42bn in 2009, François Hollande $26bn, and Emmanuel Macron $68bn.
The amount of public money invested through grants, subsidies, funds of funds, or direct investment is massive. Despite a small ecosystem, the Banque Public d'Investissement (BPI) became the most active tech sovereign wealth fund globally. The number of active investment firms in France doubled from 2014 to 2020 from 150 to 300. Overall, VC investments have increased by 7x between 2014 and 2020. This money now fuels startups at all stages. Series B, C, and D+ median amount has increased about 10x in the past six years. Last year, with $5bn of capital invested in 2020, France was the only one of Europe's three largest ecosystems to grow. One caveat is that the amount raised isn't necessarily correlated with a rise in the economic value, such as revenue and profit. It might just be the consequence of a higher multiple paid for the same value. For instance, the valuation multiple for SaaS companies has never been so high. Investors might pay higher for the same value.
The French startup ecosystem is booming. Name any sectors such as insurance, banking, legal, travel, gaming, and you will find great startups. A new generation of ambitious founders is now eager to take on risk to build businesses. All the infrastructures, from incubators to startup events, now exist. Paris is even home to Station F, the largest startup incubator in the world. Where does France stand today? Over 120 new $1bn+ tech companies have emerged in Europe in the last decade. France still has the smallest amount by far. The British, German, Dutch, and Swedish ecosystems dominate the European tech scene. Despite now rivaling Germany and the UK in funding amounts, France is not yet a rocket launcher for unicorns. The current conversation in France is often about solving the funding problem. Every day comes to a new announcement of the government pushing billions to fuel the ecosystem. But France's most significant issue for startups isn't fundraising anymore.
The fundamental challenge is that there are almost no significant exits in the French ecosystem so far. Avolta Partners compiled data in their "VC/M&A Tech Multiples" report. The tech exit median stayed stable at around $30m, as well as the number of exits over time. 72.6% of all exits are under $60m, and only 11.5% of companies have an exit value over $180m. The median years to exit is nine years, the median funds raised at exit is $4m, and 54% of companies are profitable. 70% of all acquirers are French corporations, which isn't a good thing because data show that foreign companies almost entirely make large acquisitions. Moreover, all of the most significant exits for VC-backed startups are under $300m. Finally, there is a big issue with IPO. There are almost none. The Frankfurt, London, and Amsterdam Stock Exchanges are working, but the French IPO market is still lagging.
The largest exits for tech companies today aren't from startups steeped in the French Tech ecosystem. For instance, the largest tech exits deals in 2020 almost didn't raise any money and, for most, aren't even headquartered in Paris. HG capital bought Septeo for $1bn while Silver Lake poached MeilleurTaux for $850m and Silae Expert for $600m. Large exits in France are today driven by local players who aren't VC-backed. These are impressive businesses that for sure create much value. The French tech ecosystem also needs liquidity for VC-backed companies. Liquidity means recycling both the capital and the experienced talent to build a new generation of companies.
A startup ecosystem can't last without significant exits. Some are raising concerns over the situation. As long as money is flooding with endless fundraising rounds, it's a hidden problem. Startups have more money to deploy while investors grow their assets under management. Everyone is dancing until the music is over. Then it's another story. Fundamentals such as unit economics, profitability, profit margin, and competitive moat will matter again. The critical question will be how many good businesses there are once you lift the hood. These businesses will need to generate strong cash flows and profits to wait until large exit opportunities are more common. The excellent report State of European Tech states that "Europe's startup ecosystem has developed significantly over the past decade, with unprecedented growth in funding, jobs, and valuations. But there are nonetheless still challenges ahead such as a lack of exit opportunities, including IPOs or M&A."
There is a delay between capital injection and large exits. It takes time to develop great businesses. In Europe especially, it takes time to scale outside the local market. The first generation of French VC-backed outliers sold for less than $300m, the second generation might reach the billion-dollar mark and the third generation multi-billion dollars exit. The French ecosystem is nascent but growing. It will take decades to build and sustain a thriving ecosystem. As a leading seed investor in Paris noted, it's time to think differently about France!
A startup ecosystem is, of course, much more than money. An ecosystem needs talents having the ability to scale companies, a risk-averse entrepreneurial spirit, world-class universities, acceptance of failure, a legal system with the right tax incentives and labor laws, and so much more. It's tough to create a startup ecosystem. Silicon Valley itself is a miracle. Steve Blank's "Secret History of Silicon Valley," Paul Graham's "How to be Silicon Valley" and "Can you buy a Silicon Valley" as well as Marc Andreessen "What It Will Take to Create the Next Great Silicon Valleys" are a mandatory reading to understand the complexity of the challenge. Not having a thriving startup ecosystem isn't an option today. Being dominated technologically also means undergo political, economic, intellectual, and cultural domination. Like other nations, France has no choice but to be successful.
Overall, the French tech ecosystem faces the same challenges as other European nations. Europe is still a small and nascent startup scene that attracts less than 14% of all venture capital money. The US and China dominate the tech industry. Furthermore, Europe isn't a single market. It's highly fragmented between 27 countries with different cultures and languages. Looking at the Eurostat data, little more than half of the European citizens claim to be able to hold a conversation in a second language. It makes it harder and longer to scale in Europe and benefit from increasing returns of scale. The success of the French tech ecosystem is also dependent on the development of the European Union. A lot of challenges ahead to tackle for the rising French Tech!
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