“Battre le fer pendant qu’il est chaud…” is one of the more popular French expressions and roughly translates the title above. It also precisely captured the tone I witnessed while in France a few weeks ago. While most everyone seemed to accept the circumstances imposed by the pandemic and were dutifully masked and distanced, there was a distinct sense of enthusiasm, which is also borne out in some of the recent economic and financial data. Ironically, it is considerably harder for the French to travel to the U.S. and yet case counts there are relatively low and declining. The Covid infection rate is 106 per 100k residents as compared to 313 per 100k in the U.S. The ability to visit France now appears to be changing as the European Council just restricted Americans from non-essential travel to Europe (and France just banned all unvaccinated travelers).
Over the last few years there has been a concerted effort to strengthen the French start-up ecosystem, in part as an acknowledgment that France over the last decade has been a distant #2 (or #3) to the United Kingdom, flip flopping with Germany for runner-up status. According to EY data, 5.4 billion euros was invested in 620 companies in France in 2020, as compared to 12.7 billion euros in the U.K. and 5.2 billion euros in Germany (over $156 billion was invested in 11,024 U.S. companies in 2020). Of the 620 investments, 436 (~70%) of them raised less than 5 million euros. Between 2019 – 2020, the level of investment activity increased over 25% in France while Germany only grew 10.9% with the U.K. increasing a mere 1.7%, according to Pitchbook analyses (which also had Germany slightly ahead of France in 2020). Like many other regions, the average round size for French companies has increased significantly and in 1H21 was 32.6 million euros, in part due to the impact of the eight mega-rounds (greater than 100 million euros in size).
The formula for France’s resurgence and increased relevance in the venture capital landscape is one that other regions around the world have deployed, as well as many secondary American cities. Analysts have pointed to three significant contributors in France: (i) tax reform which has lowered rates on dividends and wealth; (ii) retention of talent via “fast tracking” immigrant visas and programmatic outreach to recent graduates; and, (iii) public sector investment to support entrepreneurial ecosystems around the country. It is estimated that Banque Publique d’Investissements (BpiFrance) was one of the top ten venture investors in France in 1H21, accounting for 20% of all early stage funding according to the Financial Times. In 2019, President Macron earmarked 5 billion euros for later stage investments with another 2 billion euros for early stage. In response to the pandemic, another 4 billion euros were set aside for entrepreneurs.
The entrepreneurial ecosystem in France now counts 13.2k start-ups and 342 venture capital firms, with 44 angel networks and 149 incubators and accelerators, according to Tracxn. This distributed infrastructure has clearly contributed to the strengthening of the French innovation ecosystem. CB Insights reported that there was a 6x increase in start-up activity in 2Q21 as compared to 2Q20. Dealroom has identified 27 “unicorns” now in France; there were only nine in 2018. And this activity is not lost on public equity investors with the MSCI France Index ahead over 20.8% year-to-date through August 2021 (trading at 24.8x P/E).
These efforts appear to be paying off. As the French venture capital market continues to mature, expect to see a greater proportion of the financings be later (and larger) stage, which is reflected in the breakdown below (Pitchbook data). Yet still, France continues to lag in relative attractiveness by foreign investors. It is estimated that 65% of venture financings included a U.S. venture firm as opposed to more than 75% in Germany. Dealroom calculated that 31% of all capital invested in French companies this year was from U.S. investors, up from just 13% in 2020, but below the more than 40% in the U.K. and Germany. The top five French venture financings in 2020 accounted for 22.2% of all capital invested – the continued surge of foreign investors should lead to larger round sizes.
While clearly a complicated continent, Europe was the fastest growing region for venture capital investment according to Sifted (part of the Financial Times) and Dealroom – obviously, not the largest region. McKinsey analyzed the top 1,000 venture-backed start-ups in Europe, 143 of which were based in France, and concluded that most European unicorns required between 100 – 200 million euros to achieve that status, and that for between 70 – 80% of them, they were able to get there in less than 10 years. Interestingly, 24% of these companies were in the life sciences/healthcare sector (put in the “Deep Tech” category in this analysis) and appeared to be more heavily dependent upon access to great (younger) talent. “Deep Tech” unicorns required 215 million euros of funding (median) and yet only realized 8 million of revenues (median).
Laissez-faire does not seem to be the current approach in France – and the more directed strategies appear to be paying off with a more robust venture capital and entrepreneurial environment. Only hope that I am allowed back in the country at some point.