The worst appears to be over as seed and early stage investments jump dramatically in first half 2013

Jul 12, 2013
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After a dismal Q4 2012 for startup investing in France due to the ill-conceived tax hikes and ‘reforms’, things turned around significantly in the first half of 2013 for seed and early stage investments with a 80% jump in the total amount raised and 108% in the number of announced fundraising events. This encouraging news was announced this week in the FIBAMY report (French Internet Business Angel Yardstick), which was started in the wake of the PLF2013, the 2013 budget which ushered in a series of controversial tax and finance changes. FIBAMY ultimately seeks to monitor and provide updates on the state of business angel activity in France’s internet space.

According to the report’s analysis, the big increase in the volume of deals and total amount raised appears to be a result of:

  • Roll-over of deals that were delayed at the end of 2012 due to all the uncertainties around the tax changes
  • The significant ISF increase (France’s wealth tax), which moved from 2 categories between 0.25% and 0.5% to 6 categories between 0.5% and 1.25%. Apparently many of those directly affected by this increase took advantage of tax breaks offered by investing in startups and SMEs.
  • A ‘positive dynamic’ created by the work of the Assises de l’entrepreneuriat, 9 working ‘talks’ designed in the wake of the Pigeon movement to identify, discuss, and offer suggestions on how to resolve the problems coming out of PLF2013 (retroactive to 2013) as well as improve the overall climate for enterpreneurship in France. The talks/working sessions produced some great suggestions on addressing many of the issues.  May of these suggestions were, eventually, taken on and announced by President Hollande.
  • A greater interest on the part of the press whose curiousity about France’s tech scene and startups in particular has been peaked following the Pigeon movement. This new interest has simply increased the press’s willingness to seek out news about startups and especially fundraising.

Although the number of seed and early stage deals as well as the total amount raised has jumped quite significantly, the average deal size has, in fact, dropped. This finding is logical though as, firstly, the increase in ISF rates clearly compelled more individuals to seek tax relief via this type of investing. Next, FIBAMY also speculates that the press is simply reporting more on smaller sized deals than they have been in the past.

FIBAMY actually concludes that if you take into account the tax incentives driven by the wealth tax as well as the Fonds National d’Amorcage, France actually has a reasonable amount of funds available for early stage investments. Of course, it doesn’t yet have the level of seed to early stage funds available as say the US or UK. However, with the rise of smaller-scale angel investors in recent years, the challenge of finding this type of investment has diminished somewhat for Frech startups.

The picture, however, is not as rosy when looking a mid-to-late stage deals which dropped significantly and, in fact, are still off by approximately 50% since the start of the crisis (back to 2008). This has been a long-standing problem for French growth stage startups who by both interest and need, are often compelled to look abroad for growth stage investments. The apprehension to risk taking is often highlighted as the main problem, but the liquidity problem is probably the bigger factor.

France has been debating ways to tackle this problem, including redeploying on a broad scale the substantial savings of the French population into supporting investments in larger deals and, of course, allocating more resources via the Banque Publique d’Investissement/Caisse de Depots towards big ticket transactions. It’s more than likely that  this huge and persistent problem will be on the top of the agenda at the next round of the Assises de l’entrepreneuriat.