French startup market blossoms

EY released its barometer in early September, which recorded 244 French venture deals in H1 2015, a 30% uptick on the 188 reported for H1 2014. However, more impressive was the rise in aggregate value. After years of hovering around the €450m mark, French startups harvested a combined €759m from investors; a staggering 70% more than during H1 2014.

The leap represents a renewed confidence in Parisian startups, hot on the heels of London and Berlin in terms of deal value and second only to the former volume-wise, according to the report.

As domestic young companies flourish, international expansion is vital for prosperity. Fortunately, this demand is being recognised. During the summer, French GP Cathay Capital revealed a €250m scheme to back French and Chinese technology startups looking to go global with the aid of an international pool of technology entrepreneurs.

Leading technology
Technology appears to be spearheading the surge in French venture capital. EY's report found the sector's startups, absent from the top five last year, have rocketed up to first place. With €234m of a total €759m invested during H1 2015, the segment was propped up by the €100m reaped by network operator Sigfox in February; the company's earlier round amounted to little more than a 10th of that figure.

Another startup area receiving increased attention was fintech. Although only the fifth most popular sector after technology, internet services, software and life sciences, the burgeoning sector is starting to attract larger rounds, evidenced by the Eurazeo-led €31m investment in peer-to-peer lender Prêt d'Union. This was the second-largest round seen in France between January and June 2015.

Guillaume Aubin, managing partner at Paris-headquartered Alven Capital, echoes the increased appetite for technology: "The technology component is becoming stronger in the companies we back, with developments like virtual reality and imaging. We find more projects coming to us and the quality of the assets is going up." Indeed, Alven has inked 10 deals in 2015, doubling its previous annual track record. Furthermore, the venture house plans an additional three or four transactions before year-end, Aubin says.

Bubble trouble
Although a sign of investors' faith in the French landscape, the ballooning ticket sizes collected by startups could spell long-term trouble, according to Alven's managing partner: "We are beginning to worry about where these slightly excessive valuations might lead."

To mitigate these emerging risks, Aubin advises working with companies as early as possible. "In our work, we try to enter companies at an earlier development stage, while they remain less visible. We find there's far less competition at the seed, series-A level, which prevents equity tickets from climbing up too much." Testament of that approach is the firm's leading role in the $2.25m and €7m rounds for software developers VideoStitch and Genymobile, respectively. 

Once an integral part of the startup structure, Alven steps back and lets others take the lead in successive investments. As was the case with the €10m series-B for Lengow in early-September, when new backers Serena Capital and BPI France led the round.

While the mood towards French startups is clearly positive, clouds are looming on the horizon with regards to fiscal matters. Says Aubin: "The way French startup founders are taxed under the current system when they sell off their business means many of them will transfer their fortune elsewhere after the exit. Once based in a new jurisdiction abroad, the entrepreneur will most likely not turn to France again when launching their following business project."

While international expansion is vital for the prosperity of France's explosive startup scene, it could be that by taking their own companies overseas, local entrepreneurs are less inclined to return home to support the next generation.

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• Topics
• France
• Early-stage
• Venture
• France
• Top story
• EY (Ernst & Young)
• Alven Capital
• Eurazeo
• Cathay Capital
• unq2015oct