Rude VC: 3 broken arrows of growth capital in France

Jun 11, 2013
Vote on Hacker News

liquidity-tapThe other day during a stimulating conversation with five of French tech’s movers and shakers, the subject came up about the challenges facing high-potential tech firms in need of growth capital.

Setting aside the Yahoo/DailyMotion debacle for a moment (which I fear will carry disastrous long-term consequences for cross-border m&a, one of the three ‘arrows’), I’d like to address a second arrow which is the lack of a viable public market on which to IPO a tech company in France. The general feeling among performance-focused VCs in France is that the public markets do not represent an adequate avenue for sustained financing and liquidity potential.

Let me clarify a few terms I’ve chosen deliberately in that last sentence. First, I’m specifically referring to VC-backed firms – in other words tech startups (be they ICT, life science, or energy) that received financing at an early stage and prioritized revenue acceleration over profitability. By performance-focused VCs, I mean those investors whose sole objective is capital gains generation, as opposed to those for whom recurring management fees represent a significant wealth creator. Finally, by sustained financing and liquidity potential, I mean a market that, beyond the initial fundraising from the introduction (however successful), allows a listed company to leverage its quoted status for further benefit (for example, future m&a, exits for the VCs and early founders, etc.).

A stock market’s inability to provide sustained financing and liquidity potential to its listed companies is the consequence of low trading volumes on the listed companies’ shares. For small albeit growing French tech firms aspiring to go public, the most likely exchange for which they are eligible is the Paris Alternext. Opened in 2005, the Alternext was created with the very objective of serving as an alternative route for SMEs that may lack the necessary resources needed to satisfy the requirements of a regulated market like the Eurolist (now NYSE Euronext). The Alternext exchange currently hosts approximately 200 companies. For a company to go public on the Alternext, it must meet the following requirements, which as you’ll notice are relatively light:

  • possess at least 2 years of audited financial accounts
  • submit and obtain AMF approval on a prospectus
  • meet a minimum capital float of 2.5M€

So I was curious to see if actual evidence corroborated this feeling of inadequate liquidity on the Alternext. I examined the trading volumes of Alternext companies and compared them with those of a market that is arguably the gold standard in tech stocks: the Nasdaq. I expected that Nasdaq stocks would surpass Alternext stocks in trading volumes but never fathomed the magnitude of the difference. The disparity was overwhelming and incontrovertible. Tech stocks listed on the Nasdaq have trading volumes (in value terms) that are 5000 ~ 7000 times higher than tech stocks on the Alternext. And no matter how you slice it. Take Nasdaq’s highest dollar volume stock, Apple, and its volume exceeds the Alternext’s leader by 5600 times. If we take an average of the top 10 and the top 25 on each exchange, Nasdaq’s dollar trading volume is 6600 and 7200 times higher, respectively, than those on the Alternext (many thanks to Nilanjan Basu who worked all weekend crunching this data).

In other words, the evidence supports the general feeling among French VCs that the Alternext does not provide sufficient liquidity potential. Incidentally, the analysis for the Eurolist B & C companies supports a similar conclusion, however these exchanges are less focused on tech stocks than the Alternext.

And now for the silver lining…

One ray of good news in this analysis is that one sector stands out as possessing relatively high trading volumes on the Alternext: the life science sector. Although life science companies represent only about 1/3 of the Alternext listings, last month they accounted for over 70% of the trading volumes in value terms. (By contrast, ICT firms only had about 16% trading volumes, despite the fact that they are nearly equally represented on the Alternext). Four of the top six and six of the top ten volume capitalization firms on the Alternext last month were life science companies. So one could argue that the Alternext is more or less functioning properly for the life science sector.

In a future post I’ll explore why this may be case…

alternext-sector-volumes