France is the second largest VC market in Europe after the UK. If you take Scandinavia to be a single market then France comes in third. Germay is challenging this position and may have already become number 2 by deal volume and dollars / euros invested. Scandinavian funds have also struggled to bounce back from the 2008 venture melt-down response to the financial crisis.
The French government has put in place amazing tax incentives for wealthy folks to minimize their tax burden and encourage investing in early stage companies. Some of the funds have also benefited by providing major tax incentives for their institutional LP cash investors. The French labor market requires employers to pay significant severance to terminated employees; so if you were just laid off from Accenture or France Telecom, you will enjoy unemployment benefits (paying you around 50% of your salary or better for over a year), plus some tax free termination money in your pocket. Maybe that’s a good time to start a new web site or tech company and tap angels and VCs.
France has always been an early technology adopter. The Minitel was well in place and adopted by the population in the 1980s, a decade before Mosaic came along with the first web browser. Broadband arrived with higher levels of penetration and edge speeds than in the UK or the US. Deregulation of telecoms and high penetration of IPTV (or what is functionally two-way, interactive TV) has made France a hotbed for entrepreneurship. In contrast to their risk-averse cousins in Germany, the French have excelled in entrepreneurship and venture capital. They also have Europe’s second largest population after Germany with over 60m people. Bolt on French speaking Belgium and Switzerland and you have a sizeable market base of customers or users from which to grow. Culturally the French don’t care what their boss thinks and they sometimes speak their mind without appearing concerned with whom they might offend. In my view, this breeds natural entrepreneurs that take action on ideas rather than keeping that job at a state owned monopoly and never making the entrepreneurial plunge.
Today I find the Paris startup scene to be red-hot. My meetings in cafés and offices feel just like my meetings in San Francisco or Palo Alto. Often the entrepreneurs have already sold a company to Microsoft, worked and lived in Silicon Valley or London and now they are LP investors in one or more VC funds as they launch their new startup. Paris has mature angel investors some of whom are operating like super-angels investing in two companies per week. Accelerators are popping up all over. Entrepreneurs and bankers are creating crowdfunding platforms and the number of VCs actively investing from seed to later stage growth has reached a critical mass. Deal-making lawyers like Daniel Kahn from Kahn & Associés almost feel more like investment bankers than lawyers reminiscent of the guys at Wilson Sonsini and Orrick in the Valley.
I lived in Paris for two years as a teenager, graduated from a bilingual high school, speak French and have life-long friends there. When living in London, I took the Eurostar to Paris whenever I could and worked from a second home in the south of France during the summer months. At The Founders Club I had general partners from two top Paris VCs – Idinvest (formerly AGF Private Equity) and Ventech on my advisory board; so I still see the good growth stage deals. Sofinnova Partners, considered by many to be the number one venture capital firm in France, is an example of a fully global investor. French companies make up a small minority of its overall portfolio. Established in Paris in 1972, Sofinnova has invested in nearly 500 companies and has about $1.3bn of assets under management. Currently, 30% of their investment companies are headquartered in the US, the remainder spread across Europe. Sofinnova invests across healthcare, IT and cleantech.
Let me introduce you to Antoine Papiernik, Managing Partner of Sofinnova. His focus is healthcare and life science investments.
We are Not Looking for a Needle in a Haystack. We are Looking for the Head of the Needle in the Haystack! – Antoine Papiernik, Managing Partner, Sofinnova Partners
Sofinnova is not looking for a needle in a haystack, but the head of the needle in the haystack. “Some of the deals we are doing have two guys in Minneapolis and two in Antwerp with clinical trials in South Africa.” I asked Antoine about the Food and Drug Administration (FDA) which is the American regulatory government body that has increased the time and cost of getting a device or drug to market. There is no getting around the FDA. Without FDA approval, he said, you can’t pass go. Every one of our companies has an FDA strategy. It used to be that 510k was the fast track to FDA approval and that Pre Market Approval (PMA) was the long path. The FDA has become so strict that the time lines and cost for a 510K have become the same as PMA. The 510k strategies for our companies have simply become PMA strategies. Time lines for product development can be three to five years and then more years for approval.
“Europe is key. In Europe we can get a drug into humans here first and begin to prove the regulatory path. Moving part or all of your team to Europe is not getting around the FDA. You keep your US strategy and actually sit down, meet and even negotiate with the FDA with total transparency. We show them everything we are doing and agree on a path. We don’t hide anything. We get actual specific end points from the FDA on what they want to see, such as the number of patients to test a drug. The location of clinical trials should be in a tier I country, normally North America and Western Europe, but some eastern European countries and South Africa are being recognized as tier I countries as well. In reality, there are centers of excellence everywhere. When you see clinical trials being conducted in China and India, they are really preparing their drugs for those specific home markets.”
Bankruptcies and the French VC Model – Mark Bivens, entrepreneur & VC at Truffle Capital
Nic Brisbourne crafted a clear and cogent post about the economics of venture capital.
To be succinct, the VC model as practiced by the DFJ US is “for every 10 deals we do, we lose all of our money on 5 to 6, we make a modest multiple on 2 or 3, but we make a lot of money on 1 or 2.” Whereas DFJ Esprit leans more toward a 1/3, 1/3, 1/3 spread.
The vast majority of VC funds in France do not follow this model. I can recall an experienced and well-respected VC investor from a prominent French fund boast at a conference how, in all his years investing, he has never had a portfolio company go bankrupt. That spirit still reigns in France today.
VC funds in France eschew bankruptcies. The common process of portfolio attrition practiced by our anglo-saxon counterparts is practically non-existent here.
A partial explanation is structural. Many French VC funds are essentially subsidiaries of banks or family offices. The fund “GP’s” are in reality employees of the subsidiary. Carried interest is difficult to implement and hence rare. Accordingly, the fund management team forfeits the strong alignment of incentives to produce capital gains that a carried interest mechanism promotes.
Furthermore, the head office of the fund subsidiary and, by definition, the employer of the fund management team, does not want the black eye of a bankruptcy marring their bank’s reputation. Which brings me to my second explanation…
There’s is a strong cultural element at play here too. Bankruptcies are anathema to reputation in French business. Failure is a scar for life. The preferred option is to support the zombies, drip-feeding them with an occasional capital infusion when in critical condition, or better yet, turn to the government for a quick fix in the form of a subsidy.
I would be remiss to disparage this VC model à la française without acknowledging the pain of attrition. Laying off headcount, for example, is technically very difficult in France, and even more importantly, is a very unfortunate situation for those employees who suddenly find themselves back in the throes of a glacier-like hiring market.
However, I question the effectiveness of the model over the long term, its direct ability to generate capital gains, and the subsequent indirect impact on economic growth and job creation.
There are of course exceptions. I can name a few French venture funds that genuinely practice the model of bolstering the high-performers and killing the zombies. But they represent a rare minority on the French marketplace… as do high 10-year VC IRRs.
Too Big to Care – Mark Bivens, entrepreneur & VC, Truffle Capital
There is a subtle but insidious trend burgeoning within France’s private equity industry. This trend is a shift in fund objectives from a “capital gains generation” model towards a “fee generation” model.
In other words, the financial benefits accruing to private equity GP’s are increasingly coming more from management fees than from carried interest.
As many of you may know, venture capital and private equity general partnerships extract value from the investors of the money they manage in two ways: fees and carried interest. Historically, a conventional LP/GP agreement would have a “2 & 20″ structure, meaning that the GP assessed an annual fee of 2% on the amount of money they manage, while sharing in 20% of the funds’ capital gains in the form of carried interest. The conventional wisdom held that the 2% management fee was sufficient to cover the operating expenses of a fund (i.e. office rent, staff salaries, legal expenses, conferences, etc.), while the 20% carried interest was intended to reward supersize performance of the fund managers once they’ve returned all of the investors’ money.
So for example, a general partnership managing a fund of 100m in size and returning 3x the investors’ money at the end of the life of the fund commitment would receive:
• 2m per year in management fees
• 40m in carried interest (20% of fund gains of 200m)
Whereas an underperforming general partnership that fails to return all of the investors’ money (usually + some minimum “hurdle” rate of return) will not receive anything in the form of carried interest.
This “2 & 20″ model, with slight variations across general partnerships, has generally worked well for the past several decades in the sense that both LP’s and GP’s found their respective returns and incentives to be properly balanced.
This model merits scrutiny, however, when fund size becomes disproportionately large. An annual management fee of 2% of 100m sounds appropriate, but the same fee percentage on a fund size of 1 billion would be 20m per year. Because administering a fund of 1 billion doesn’t require a significantly larger management structure than for a 100m fund, 20m a year seems like an awful lot of money just to keep the lights on.
Concerns over this model surfaced in the U.S. some years ago, before the private equity bubble burst, when many buyout funds were becoming multi-billion dollar behemoths. The subsequent credit crunch and ensuing defaults or drastic reductions in commitments to the asset class from LPs served to correct many of these imbalances. I fear however, that in France these imbalances, while also currently masked to some extent by the credit crunch, are threatening to grow unchecked.
Wouldn’t France’s private equity industry follow a similar course correction on this matter as its anglo-saxon counterpart ? Three primary distinctions suggest otherwise:
1. Investors in French private equity and venture capital funds encompass much more than institutional LPs. While the classic LP/GP fund still exists, it is being forced to make room for retail investment vehicles. Increasingly, tax-incentivized retail investors represent significant sources of funds for the asset class. In 2009 for example, retail investors represented a whopping 1.1 B€ of the 3.6 B€ in total fundraising. Retail investors, (“unsophisticated investors”, to borrow the U.S. term) are as a class empirically less discerning and demanding than institutional LPs.
2. Tax incentives skew the retail investors’ motivations. Retail investment vehicles are booming thanks to generous tax incentive mechanisms. For example, an investment in a typical FCPI or FIP vehicle allows a 25% instant tax credit on one’s income tax and up to a 50% instant tax credit on one’s wealth tax. Then there are the incubator holding vehicles which can offer a wealth tax credit of as much as 75% of the invested amount. Retail investors’ expectations of capital gains are overshadowed by the immediate gratification they receive in the form of a tax shield.
3. Egos abound in both cultures, but manifest themselves differently. The pride factor in anglo-saxon private equity and VC culture centers on capital gains (e.g. every VC dreams to find the next Google); whereas France’s industry professionals tend to favor the amount of assets under management as a measure of testosterone. The first two distinctions might explain the dramatic disparity between returns of institutional funds and retail funds. For example, a comparison of IRRs for French private equity funds since inception through year-end 2008 depicts a 26.8% IRR for the top quartile of institutional funds versus a paltry 1.9% IRR for the top quartile of retail funds.
The damage of these characteristics of France’s private equity industry is compounded by the steadily ratcheting up of management fees: while 2% used to be an industry standard, fees in the 3~4% range are rapidly becoming the norm in France.
So wherein lies the “break-even point”? I.e. how large can the pool of assets under management be without tipping the motivations of the GP’s away from capital gains generators to fee generators? My fear is that this threshold is not that high.
League Table of Most Active VCs in France
These league tables like the other ones I have posted are a bit out of date. These represent research for VCs that invested in French domiciled startups in rounds of at least $5m in 2009 and 2010.
|1||CDC Entreprises||Paris, France||Venture Capital||US$ 1,923||21|
|2||CM-CIC Capital Prive||Paris, France||Investment Bank||US$ 373||13|
|3||Amundi SA||Paris, France||US$ 826,684||12|
|4||Credit Agricole Private Equity||Paris, France||US$ 4,456||12|
|5||Seventure Partners SA||Paris, France||Venture Capital||US$ 601||11|
|6||Idinvest Partners||Paris, France||Venture Capital||US$ 3,366||10|
|7||XAnge Private Equity||Paris, France||US$ 353||9|
|8||Auriga Partners SA||Paris, France||Venture Capital||US$ 397||8|
|9||Sofinnova Partners||Paris, France||US$ 1,328||8|
|10||A Plus Finance||Paris, France||US$ 66||7|
|11||Emertec Gestion||Grenoble, France||Venture Capital||US$ 144||7|
|12||Serena Capital SAS||Paris, France||Venture Capital||US$ 120||7|
|13||Ventech SA||Paris, France||Venture Capital||US$ 439||7|
|14||Alto Invest||Le Chesnay, France||6|
|15||Alven Capital||Paris, France||Venture Capital||US$ 180||6|
|16||Naxicap Partners SA||Paris, France||US$ 974||6|
|17||Oseo||Maisons-Alfort, France||Government||US$ 361||6|
|18||Edmond de Rothschild Investment Partners||Paris, France||US$ 580||5|
|19||Fonds Strategique d’Investissement||Paris, France||5|
|20||I-Source Gestion SA||Paris, France||Venture Capital||US$ 225||5|
|21||Innovacom SA||Paris, France||Corporate Venture Capital||US$ 541||5|
|22||Truffle Capital SAS||Paris, France||Venture Capital||US$ 462||5|
|23||123 Venture||Paris, France||US$ 180||4|
|24||ACE Management||Paris, France||US$ 166||4|
|25||Developpement et Partenariat||Paris, France||US$ 180||4|
|26||Gimv NV||Antwerp, Belgium||US$ 2,116||4|
|27||iXO Private Equity SAS||Toulouse, France||US$ 361||4|
|28||Oddo Asset Management||Paris, France||US$ 204||4|
|29||Sofimac Partners SA||Clermont-Ferrand, France||US$ 240||4|
|30||Sudinnova||Lyon, France||Venture Capital||US$ 54||4|
|31||Turenne Capital Partenaires SA||Paris, France||US$ 361||4|
|32||BNP Paribas Developpement||Paris, France||US$ 295||3|
|33||BNP Paribas Private Equity SAS||Paris, France||US$ 971||3|
|34||Cap Decisif Management||Paris, France||Venture Capital||US$ 58||3|
|35||CDC Innovation||Paris, France||Venture Capital||US$ 499||3|
|36||CEA Investissement||Grenoble, France||Government||US$ 18||3|
|37||CIC Banque de Vizille||Lyon, France||3|
|38||Entrepreneur Venture||Paris, France||Venture Capital||US$ 42||3|
|39||Jaina Capital SAS||Paris, France||Angel Investor||US$ 120||3|
|40||Masseran Gestion SAS||Paris, France||Venture Capital||US$ 56||3|
|41||Matignon Investissement & Gestion||Paris, France||Venture Capital||US$ 301||3|
|42||Midi Capital SAS||Toulouse, France||US$ 32||3|
|43||NextStage Aurel||Paris, France||US$ 176||3|
|44||OTC Asset Management SA||Paris, France||US$ 301||3|
|45||Societe Hospitaliere d’Assurances Mutuel||Lyon, France||Venture Capital||3|
|46||360 Capital Partners||Milan, Italy||Venture Capital||US$ 120||2|
|47||Apax Partners LLP||London, United Kingdom||US$ 20,000||2|
|48||Backbone SAS||Paris, France||2|
|49||Bioam Gestion||Paris, France||Venture Capital||US$ 67||2|
|50||Esfin Gestion||Courbevoie, France||Venture Capital||US$ 72||2|
Some of these are government-backed funds with retail investors and are not very impressive. Others, including some government backed funds, are indeed impressive and a very important part of the market. My list of VCs above reflect research on investors that invested into companies in 2010 and 2011 that have raised at least $3m in France.
There are plenty of funds in France, but mixing both IT and healthcare, here are a few that I like: Sofinnova, 360 Capital Partners, I-Source Gestion, XAnge, Truffle Capital, Seventure, Serena Capital, Edmond de Rothschild Investment Partners, Auriga and Ventech.
My advice to French entrepreneurs is the same as with all other European entrepreneurs: Approach a few VCs in London and the States, possibly a few in Germany if you can get a good intro. Some of the lawyers in Paris are also great advisors. If you can get someone like Kahn & Associés as your law firm, you get very good practical advice and will be very well connected to appropriate VCs. Daniel Kahn can help you develop internationally, including on the West Coast, Israel and China. More information at www.afic.asso.fr.
If you want to come to Europe this summer there is no better place to be in June than Stockholm and London. Join us!
Stockholm – The Future of Raising Angel & Venture Capital Funding – June 3
Stockholm – The Future of Angel & Venture Capital Investing – June 4
London – The Future of Angel & Venture Capital Investing – June 9
London – The Future of Raising Angel & Venture Capital Funding – June 11