The relationship between founders & VCs is a delicate one, to say the least. Because of the nature of their relationship, it is often in their mutual benefit for both to brush any tension other the rug. As such, the dark side of working with Venture Capitalist is often neglected or ignored, and so the vicious circle of unsuspecting founders getting into bed with VCs with bad practices continues. In an effort to provide clarity into such relationships, I am writing a series of posts called “VC Politics.” I have kept all sources anonymous, in order to preserve relationship, however in each case, I have talked to several actors deeply involved with the VC in question in order to get a well-rounded perspective.
The question around the role of a government in the startup ecosystem is a difficult one, with no easy answer. If you listen to TechStars co-founder David Cohen, their role is to ‘get out of the way;’ however, in Europe, for better or for worse, that’s just not how government operates. On a European level, on a member state (national) level, and on a local level, government encourages innovation through grants, advantageous loans for startups, and even investment.
In France, the government was hailed last year when it announced that all of these activities, previously separated into many different organizations, would be rolled together into one organization, BPIFrance, so that startups would have one face, one person, one door to open, in order to get access to all of the government’s innovation-oriented resources.
BPIFrance’s president, Nicolas Dufourcq, is a level-headed guy, having come from being #2 at CapGemini, and seems to have a good sense of the government’s role in innovation; I have sat down with various members of BPIFrance on several occasions, and the message between them seems to be shared, a common vision around supporting growth, with a focus on support.
BPIFrance doesn’t invest in Seed Rounds, so you won’t be raising 500K€ from the government. Instead, they invest in Seed Funds, like Partech Entrepreneurs, Elaia Alpha, and a total of over 100 other local, national & international funds in France. In addition, for startups who raise capital from the private sector, BPIFrance offers low-interest loans & grants that match the company’s capital, meaning raising 300K€ from Angels can get you up to 300K€ from BPIFrance – not bad.
BPIFrance invests directly in higher round – 20 Million euros and up, to be exact – via its Large Ventures, which means that, for Series C rounds & later it can find itself competing against private investors. One would imagine that, given BPIFrance’s “support” role, that, if enough private investors are involved in the round, that BPIFrance would led the private market take the reins, especially since it has its hands in most funds to begin with.
One might also imagine that, if the fund who wanted to invest €20 Million into a French company was foreign, and thus came from a fund that BPIFrance was not involved in, that this would be a sign of BPIFrance’s success – that is, if BPIFrance’s goal is to encourage investment in France, than what better demonstration of success than a non-French fund investing in French companies?
The Dark Side of Public Funds
The downside to government-run funds is, of course, that their definition of ROI is not the same as a private fund, nor is it necessarily aligned with the interests of founders. BPIFrance isn’t expected to return a fixed ROI to its sole LP (the Elysée), which means that things like “valuation” and “terms” are secondary to getting in rounds that will make headlines.
I have recently heard from VCs that BPIFrance has taken to pushing out private investors by inflating the valuation – after all, founders want higher valuations, right? – in order to get in rounds, and push out funds that aren’t in the BPIFrance family. VCs of French funds are unable to speak out against such practices – after all, BPIFrance is both an LP to their early stage funds and a potential co-investor in follow-up rounds to their investments; however, for funds that have no need to placate BPIFrance, the practice is becoming too much to handle, and late-stage investment in France is suffering.
We often speak about the lack of late-stage funding in France; it may be that late stage funds are being kept at the gates to Paris by the government, in which case, BPIFrance is impeding itself from completing its very mission.
Ireland: A great Example of Public Funds
I don’t want to leave on the thought that “public funds don’t work,” and I don’t necessarily think it’s true; however, there are not many examples of success to follow on, so many funds are marching in the dark.
Ireland however, through Enterprise Ireland (EI) and the Irish Development Agency (IDA) have won over my confidence in terms of their investment strategy by telling me just one point: their ability to get more money for follow-up funds from the government is based on their returns on investment.
I would love to see BPIFrance and other government funds (even the European Commission’s fund) adopt such a practice; to be both public about their ROI, as well as to use it as a metric for receiving funding in future years.
For now, I think BPIFrance needs to also take a hard look at a role in the French startup ecosystem. In an ideal world, BPIFrance wouldn’t exist – that is, it’s success comes by rendering itself unnecessary. In order to do that, it needs to enable foreign investors to get good ROI on their investments in France. Private European funds like Index Ventures & Mangrove Partners, who have local investments and American LPs, are giving good returns to American LPs, showing them (with cash) that investment in European startups is a good one.
In order to keep out of naughty practices, I hope to see BPIFrance adopt a bit of transparency about their investment terms, their ROI, and their KPIs for success – otherwise, France will be in the same position 7 years from now, dependent on public money in order to get Seed capital all the way up to Series C,D,E,…