French Startups are getting invested in, just not by French VCs

Jan 21, 2013
Vote on Hacker News

10025660_1358756586_invetissement-start-upIn the beginning of the year, we reported on the state of investment in France -more money went to startups in 2012 than 2011, a total of 543 million euros, or a 93% year-to-year growth. It was made very apparent that this funding was concentrated, with “Deezer(€100M), Criteo(€30M), Spartoo(€25M), Viadeo(€24M), Fotolia(€117M) and Sensee(€17M)’s impressively large rounds of funding, making up more than half of the total amount of funding raised this past year,” (as we pointed out). More interestingly is the source of the venture capital, and the fact that while French startups more capital coming there way, French VCs are investing significantly less, having dropped 33% in comparison to two years ago. This funding includes funding of non-French startups, but it is easy to see how international the funding scene is becoming.

Les Echos did a great piece on the subject this week, pointing out how the public sector is trying to make up the difference. They quote Elaia Partners partner Marie Ekeland as saying that 60% of funding in France is coming from the public sector, as opposed to around 30% just two years ago. With projects like Paris Capitale Startup and the government’s public bank plans, it’s hard to see things improving over the next few years, at least for French VCs.

VC funds in France are more or less dependent upon the government for their existence, with most of them receive funding from individuals who invest just for the tax breaks associated with it. While this has produced a certain liquidity in France, the long term effects – distinctivizing investments, allowing for bad money to enter, less risky investments – are starting to bubble up to the surface.

International VC funds, like Index Ventures & Accel Ventures, have the luxury of sitting across the channel in London, making trips out to Paris to cherry pick the best startups – this is good for startups, but it’s making it harder for French VCs to get deal flow. Unfortunately, it seems, like in the startup scene, that the best moves to be made would trim down the number of VCs. One necessary change is removing the tax breaks, so that VCs rely less on management fees and more on successful, risky investments. Another is that of incentivizing the deeper pockets with lower capital gains taxes, instead of tax breaks, so that startups aren’t going to Business Angel groups that are traps, and are going to strong individuals who are motivated to invest in startups.

The most promising of startups, who seek to grow globally, will continue to seek large rounds from Global VCs, and France shouldn’t focus on competing on that level. French VCs have plenty to gain from Seed, Series A & Series B rounds to help startups dominate the French & European market – the only VC firm I could see investing beyond that is Partech, but they’ve got offices all over the world, so they really are Global.

Good news, Startups – French VCs are going to be fighting with International VCs over the next few years, so valuations may finally start to go up. In every case, do what’s best for your business, which is not always what’s best for your country – it is your country’s fault for not aligning their success with the success of their investors and businesses.