French VC fundraising shifts towards sector specialisation

Francesca Veronesi
05 April 2018

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Sector-specific venture capital funds are becoming a popular option for French firms. Francesca Veronesi asks investors about the advantages and potential pitfalls of specialisation in the region

The first quarter of 2018 has seen seven French venture funds holding either a first or final close, totalling commitments of €924m. Among these, five were sector specific: EdRip's BioDiscovery5; Sofinnova Partners' IB I; Seventure's AVF; iBionext's Growth Fund; and Five Seasons' Ventures I.

Sofinnova has traditionally focused on medical devices and biopharmaceutical companies, but this year it launched a €125m vehicle, Sofinnova IB I, which targets companies in agro-chemistry, biopolymers and bio-sourced speciality chemicals.

Additionally, well-established, generalist private equity and venture firms, such as 360 Capital Partners, Serena Capital and Omnes Capital, have started raising funds with dedicated investment strategies – whether in terms of sector, investment size or growth stage – rather than relying on generic venture funds.

We can add value to our portfolio companies by having deep connections to people in the industry. It is easier to build a reputation in a specific sector than as a generalist" – Niccolò Manzoni, Five Seasons Ventures

Notably, new VC firms are also opting for sector-specific, or niche, approaches from the start. iBionext's inaugural fund, iBionext Growth, which closed on €90m, will back startups as they accelerate their development and start clinical trials or commercialisation activities. Meanwhile, Five Seasons Ventures held a €60m close for its inaugural fund, dedicated to food and agriculture technology.

Several factors are encouraging the raising of vertical funds. Firstly, as a response to the increasingly proactive entrepreneurial and technology-focused ecosystem, venture capital is reacting to the change by appointing investors with greater technical knowledge to manage funds. Sofinnova managing partner Denis Lucquin says: "We decided to raise a vehicle targeting industrial biotechnologies and their applications in the chemical industry, since opportunities in these markets have risen considerably across several geographies."

Secondly, the venture capital market in France has become more crowded. Competition for the best startups is tougher, partly because international VCs are increasingly competing with local players for French assets. Therefore, local VCs are aiming to attract LPs and win bids on the basis of their sophisticated industry knowledge and networks. Five Seasons founder Niccolò Manzoni says: "We can add value to our portfolio companies by having deep connections to people in the industry. It is easier to build a reputation in a specific sector than as a generalist." He also says that scaling a business in food requires specialised skills not necessarily held by general VC firms.

Finally, the introduction of corporates into the LP landscape has encouraged VCs to commit to distinctive industries. Emanuele Levi, partner at 360 Capital, says that, while they still represent a minority compared with institutional investors, "corporates have begun to understand the potential of startups, both as competitors and attractive targets to bolt on". He adds: "Acting as LPs in VC funds, they have the chance of starting an indirect bond with them." Knowing that sector-specific maiden funds are more likely to attract corporate backing provides a big incentive to pursue this strategy. Levi also explains that, while maintaining full independence in their strategy, VC investors can benefit from the technical expertise of big industry players.

Cautioning on corporates
However, Serena managing partner Xavier Lorphelin cautions that having an LP base overly dependent on new-entrant corporates is a less reliable approach in the long term, as the company might not recommit to a second or third fund. On the other hand, he says, "institutional investors are much more familiar with the VC space and are used to recommit to several generations of funds raised by a successful VC firm".

Fund specialisation, by its very nature, limits the number of companies that can be targeted, especially if the market in question becomes crowded. Several VC investors say this strategy demands that sector is prioritised over geography, hence encouraging French VCs to look beyond France and Europe for investment opportunities.

Serena's Lorphelin also explains that sector-specific funds are highly exposed to the success and development of the industry in question and, with many VC-targeted industries developing quickly, the future is difficult to predict. "Some telecoms-focused funds raised in the 2000s have not proven successful, partly due to the fact that the industry very quickly completely evolved", he says.