What the Gallois report means for tech startups


Last week the French government’s Commissaire général à l’investissement, Louis Gallois, released his eagerly anticipated diagnosis on France’s competitiveness to the Prime Minister, Jean-Marc Ayrault.

Encompassing six major themes and 22 specific proposals, the Pacte pour la Compétitivité de L’industrie Française is both sweeping in its analysis and prescriptive in recommending solutions.

The Gallois Report – France’s decline in competitiveness

Gallois begins by sounding the alarm: French industrial competitiveness has been declining for the past 10 years at an accelerating rate; the trade deficit exceeds 70B€ and is galloping higher; and the industrial sector’s contribution to GDP is shrinking more rapidly than in most other European countries.

The report covers a range of ideas spanning from investment in innovation, energy policy, education and training, and social welfare. I won’t review the whole report but rather focus on the parts directly relevant to the tech startup ecosystem. My spirits rose when I read the following:

« S’agissant plus précisément des actifs gérés par les sociétés d’assurance, en principe adaptés aux financements de long terme et représentant des montants considérables (1 680 milliards d’euros fin 2010)… pratiquement rien ne va vers les PME et ETI non cotées. »

Loosely translated, Gallois points out that of all the monies managed by French insurance companies (i.e. the cash they collect in the form of premiums which they must invest for a rainy day, “the float”), practically nothing is invested into SMEs or even mid-caps. Amen. Contrast this with the U.S., where 3~5% of the float of insurance companies is allocated to high-risk/high-return investments like VC and private equity funds, which in turn finance SMEs.

Accordingly, Gallois recommends a handful of concrete actions to strengthen the balance sheets of businesses and ensure that SMEs are better capitalized.

  • Extend the term of assurance-vie contracts to render them better suited to long-term investment (the implication being in startups).
  • Steer insurance companies toward investing approximately 2% of their float into non-listed firms, most likely via specialized investment funds (such as VC).
  • Encourage individual retirement accounts (PEA) to invest in SMEs and mid-caps (using tax incentives).
  • Sustain the existing FCPI and FIP investment vehicles (“retail VC funds”) by providing consistent fiscal policy, and even consider raising the cap on such investment tax shelters.

Some of these proposals sound very similar to France Digitale’s excellent set of suggestions made back in September (and reviewed here).

Not so easily dismissed

Initially, the government seemed to downplay the report. And indeed, the administration may well decide not to implement any of Gallois’ proposals. However, inconvenient as his prescriptions may be for the Socialist government of François Hollande and Jean-Marc Ayrault, Gallois cannot be so easily ignored because he is a ‘patron de gauche’. The former CEO of state-sponsored institutions like Snecma, Aérospatiale, SNCF, and then EADS, Louis Gallois has been a card-carrying member of France’s Socialist party since the ’70s. Already within the week, there have been some encouraging signals, including from the Prime Minister himself, that Gallois’ assessment will not be buried.

However, let’s not get ahead of ourselves. In 2008 the Sarkozy/Fillon government commissioned Jacques Attali to perform a similar exercise on kickstarting growth, a report for which only a fraction of the recommendations were ever implemented. My guess this time around is that on some highly-charged issues like the tax treatment for retail VC funds, the worst-case scenario originally espoused by the government will not happen, at least not right away. Recommendations like shifting investment allocations of insurance companies may meet more resistance and prove more complex to implement (though I hope that over time progress could be made here).

So as members of the France tech ecosystem, I suspect we’re facing a prospect resembling more the status quo rather than a detrimental step backwards as originally feared. The Pigeon movement and France Digitale undoubtedly deserve some credit.