RIP French Super Angels: don't fall in the new funding trap


Jerome Camblain runs Camblain Advisory in London he also angel-invest in French and UK startups for over 15 years. You can follow him on twitter at @CamblainAdvisor.
Jereome Camblain, Camblain Advisory
The French recent tax changes and its effects on the startups ecosystem have been commented a lot, and rightly so. The first money you raise, whether you call it “Love Money”, “Fools, Friends & Family” or Angel money, has a sweet name in order to avoid the shock of letting a stranger into your comfort zone. It could come from your inner circle, from incubators (with an office space + mentoring) or from an accelerator (with mentoring only); its source is mostly very local as these investors will want to interact with you in order to protect their investment. This money is still available in France, as individuals can still invest through a remaining tax shelter (PEA or TEPA ISF scheme). Local institutional seed investors are also still around, mainly successful entrepreneurs with money being managed professionally under corporate entities, untouched by the personal tax changes.
Be aware that these are small tickets (circa €50k to €150k), and are offered to a great team with a decent prototype. Pre-money valuation are often below €1 million.
Raising funds for a product that has a certain traction (user base or invoicing) remains feasible. Venture capital funds will always finance a well established funnel with a decent visibility on the cost of a customer acquisition compared to the lifetime value of a customer.
The ultimate danger zone is the stage in-between where the startup does not have any commercial traction and are caught short of cash either in the debugging phase (trust me it happens) or while their improving their product’s UI/UX.

Don’t get caught short on cash

It is mathematically obvious that the cash raised as seed will not lead you through to the commercial traction. It is also very common to stumble in the UI/UX phase as French technology firms are started by engineers (among the best in the world) who unfortunately think that UI/UX is a secondary item. Do not wait for your clients/users to tell you otherwise. Make sure you understand that marketing is not a department, it’s a philosophy.

The players who could have made this investment are the “super angels”; they are the ones hit really hard by the new tax changes.”

At this point, founders will often look at the great scalability and market sizeof their product, the unique skills of the team they recruited and, taking in consideration the dilution they would tolerate, will come up (always) to a €4 to €5 million pre-money valuation. As it might not be unjustified, this is a very difficult proposition for a venture capitalist funds investing its clients money into a firm with no commercial validation. The players who could have made this investment are the “super angels”; they are the ones hit really hard by the new tax changes.
A “super angel” is a successful entrepreneur, investing larger sums than the previously mentioned tax shelters allow, but not enough to migrate his/her investment activity into a professional fund with a corporate structure. He/she invests into his/her area of expertise, taking the biggest risk, at the less favorable risk/reward ratio, i.e. accepting a high price, only because his/her intimate knowledge of a particular market allows him/her to see through the situation and manage the risk through experience, guidance and contacts. As these “startups midwives” will quit investing, a lethal funding gap will appear, endangering the entire ecosystem because of political misunderstanding or unwillingness to defend successful entrepreneurs seen as privileged.
French startups, please fund well ahead of that gap; it has always been a danger zone, but now has become a dead zone, thanks to the new tax regime. Get a commitment from your early investors to support you through this phase at a pre-set valuation established according to reachable milestones… or accept a greater dilution. Better diluted than dead.