France: a confident, home market

A lot of venture capital money is earmarked for investment in France. As Gerard Tardy who spent some ten years with Schroder Ventures in Paris, (he has since set up Sitka Partners which is based in London) notes that one of the main difference in the French market today is that the amount of money to invest has multiplied by four times in just five years. Admittedly a large chunk of this increased pool of money comes from non-French institutions and cross border funds.

Undoubtedly a portion of the money now available will have been set aside to assist existing portfolio companies in the coming months as markets throughout Europe and beyond continue to cool – although few firms, if any, are willing to talk openly about the extent of this provision but it is likely that for some the weighting tip slightly in favour of the existing portfolio. The established venture capital, and for that matter private equity, brand names are concentrating on existing portfolio companies as much if not more than the incubator/ accelerator style operations, which everyone expected to suffer difficulties once markets cooled. They have, but for some retrenchment has been the least of their worries.

With the highly developed state of the French domestic venture capital market it is, after the UK and multi-country specific funds (both of which tally at a little over 165 funds), the country in which the largest number of country specific funds are raised. According to preliminary figures released by Venture Economics reflecting 2000 performance there are 40 funds investing solely in France in 2000. In Europe France is followed by Finland and Spain with over 35 and over 15 apiece, respectively. Other European countries monitored recorded at most 10 specifically targeted funds.

Venture capital investing in France has been uplifted since 1997 when the French economy picked up. In the late 1980s a number of French institutions began supporting the private equity industry and subsequently got burned and went away. Post 1997 there have been investment success stories across the sector spectrum including of course IT, Internet and Healthcare.

As the market has picked up in recent years so has the number of players and the French venture capitalists themselves have become an organised grouping behind their domestic association, Association Francaise des Investisseurs en Capital (AFIC). Incubators and accelerators have come to the fore, as have corporate venturers in a variety of financially and strategically driven guises (Air Liquide, Thomson, Schneider Electric and Viventures to name but a few) and business angel and their networks have become noticeably stronger.

While the levels of investment activity have increased considerably (see table X and the buyouts tables since 1996, which starts on page X) France has a number of infrastructure issues that could dampen entrepreneurs’ enthusiasm for risk that it must address. The most oft cited gripe is the continual shifting in the treatment of stock options but many players are optimistic that continued lobbying on this specific issue has to bear fruit eventually and soon rather than later. This optimism appears to be borne out of a belief that the message is getting through to the French government the reason for that looks in part attributable to the high profile that the Internet economy has created for entrepreneurs and success of institutions like the Nouveau Marche. Areas also cited under the infrastructure issues banner include tax rates and employment rights where realistically the lobbyists are in for the long haul.

Notably under the “Loi Allegre sur I’Innovation” passed on July 12, 1999 venture capital investment activity in France got a boost. Allegre is the former Minister for Education, Research and Technology who has a background in research and considerable standing among his peers. His achievement in respect of research is succinctly put by the European Venture Capital Association as: “An increase in the financial intervention by public entities through, on the one hand, the creation of three seed capital fund-of-funds investing in private funds and, on the other hand, the setting up of incubators within academic institutions.”

It is the latter that is of considerable interest when looking at early stage investments borne out of academic institutions. Tardy is interesting on this subject noting that following to the recent rounds of reforms French University academics are now allowed to file patents, hold shares in privately owned companies and to leave the University where they are working and have the right to return at a later date.

Without permission to do all of these things it is difficult to see how any companies could be successfully spun out of an academic institution because for many inventors/ would be entrepreneurs the risks were just too great. Namely if they failed to commercialise their project they had no fall back within French academia and to continue their career would be forced to emigrate. It is probably too early to tell but the reforms ought to retain France’s best ideas rather than see them disappear to countries like the US.

Due to anomalies in the French system it will continue to lose some of its brightest and best brains. Tardy notes that it is compulsory for researchers in French State institutions to retire at the age of 65 which has seen a number of leaders who are leaders in their field forced to continue their research outside France.

And it is likely to take more than legal reforms to change the culture of France’s largest State-backed research institute, the Centre National de la Recherche Scientifique (CNRS), which is heavily controlled by French unions. The CNRS has something in the region of 35,000 researchers with an average age of 47, despite conventional wisdom dictating that 25 to 35 is the optimum age for carrying out research. While CNRS has a strong reputation for academic research practical business applications of that research has not won it plaudits.

Aside from the commercialisation of R&D in public entities and academic institutions the “Loi Allegre sur I’Innovation” also enabled young companies to adopt “Societe par Action Simplifiee” with less stringent requirements than that applied to limited companies and it adapted the operating rules for FCPI (Fond Communs de Placement-Innovation). The FCPI is the French equivalent of the UK Venture Capital Trust, which is a closed end stock exchange listed structure enabling private investors access to private equity investments.

nCoTec is a seed stage investor with origins in the UK and Scandinavia that is hoping to invest in technology transfer, although its focus will be on spin outs from companies operating in the Sophia Antipolis Technology Park in the south of France. nCoTec began operations in the UK and Scandinavia last year and has recently held the first closing on its first independent fund raising. nCoTec has yet to open an office in Sophia Antipolis but is expected to do so in the next couple of months. Alisdair Warren, who is one of the co-founders of nCoTec notes that to get to see the very best deals in the early stage market you need to have a presence on the ground and consequently nCoTec has found itself a French national to staff this office, which is expected to do between four and five deals in the first 12 months of operation.

Sophia Antipolis posits itself as one of the largest technology parks in Europe and plans to expand double its size in the future. Aside from a large number of corporations, a great number of which specialise in the semi-conductor field, it has the THESEUS Institute on site, which runs an MBA in Information Management and High Tech Entrepreneurship. The park is also home to the European Telecommunications Standards Organisation (ETSI) and a number of other associations such as Telecom Valley, which is a non-profit business driven association set up in 1991.

Despite all of this activity – Sofia has the second busiest airport outside Paris notes Warren – there are just one or two French venture capital firms with offices in Sophia Antipolis. The majority of France’s private equity and venture capital firms are located in and around Paris. Warren is optimistic about prospects in his chosen field of investment in Sophia Antipolis and notes that placed between Cannes and Monaco the region is continually able to attract the brightest and the best so securing strong management teams is unlikely to be an issue for the firm.

On the subject of doing venture capital investment in France Warren notes: “The biggest barrier for us would be if every business was entirely French dominated. But our business just doesn’t work that way: it’s a very international and the language of business is English.” John Bouges of Crescendo Ventures, which has three French nationals working for the firm, does its French investments from its London base. Bouges notes that with the Eurostar gets to and from Paris is no longer a problem – it’s a bit over three hours from the centre of one city to the centre of the other. The fact that the firm has three French nationals working for it says a lot about a firm’s ability to do venture investing in France without French nationals on side. Bouges also says that if Crescendo gets involved in an early stage financing this would only be with the inclusion of a local VC. The French early stage market is very domestically orientated in terms of the players involved and this is in part seen as an extension of French cultural characteristics.

Entrepreneurial spirit is alive in France but to get kicking as well requires some of the infrastructure issues mentioned earlier to be resolved, specifically the treatment of stock options in order to lure mature managers away from large French enterprises. John Bouges of Crescendo says: “France has a rich legacy of success in technology and large enterprises, but it does not have third and fourth generation entrepreneurial management.”