French institutional LPs urged to nurture late venture

Two years after Emmanuel Macron unveiled his plans to make France a "startup nation", the French president pledged in September to raise €5bn from French private institutional investors – especially insurers – over the next three years. Says Eurazeo Growth managing partner Benoist Grossmann: "Insurance companies have, until now, provided relatively small tickets for late-stage venture and growth investments for non-profitable businesses, but president Macron is promising this will change". Macron explained that the €5bn funding effort will comprise €2bn for investment in so-called "late-stage funds", while €3bn will be invested in publicly listed tech companies.

The extra LP backing is meant to boost the venture fundraising environment, which has remained fairly constant in the past few years: almost €1.6bn was raised in both 2017 and 2018 across 16 and 11 fund closes, respectively, while €748m was collected across four final closes this year. Although fundraising in 2019 saw a slump for final closes, a first close for Eurazeo Growth III, with a €1bn target, is expected to take place in the coming months, Grossmann tells Unquote.

The French government is hoping to see a rise in the number of domestic startups valued at more than $1bn – so-called "unicorns". Macron is aiming for France to host 15 or 20 unicorns by 2022, the end of his current mandate. Deezer, BlaBlaCar, DoctoLib, Meero and OVH are currently the only French unicorns, which puts France behind the US with 182, China with 94, and the UK with 25, according to Radio France Internationale figures.
Since the beginning of the year, tickets of more than €50m were invested in 13 startups founded after 2010, according to Unquote Data. In total, €1.18bn was invested in these companies, with ticket sizes ranging between €50m and €230m, and the average ticket size being €90m.

PE firms that have invested tickets of at least €50m in French late-stage businesses this year have been both domestic players (Eurazeo) and US-based (Accel Partners, General Atlantic, Iconiq Capital). "PE has only recently invested growth equity in non-profitable businesses in Europe; in fact, a couple of years ago we wouldn't have seen these kinds of investments here. They have been more common in the US, but it's recent even for that market," says Grossmann.

Eurazeo, having acquired Idinvest in early 2018, is particularly invested in this segment, but consolidation between PE firms and VCs is yet to be seen regularly, Grossmann says. However, PE houses like KKR and EQT have developed their own late-stage venture and growth teams, and the French and European market has become very competitive, he adds.

New horizons
It seems like established PE investors are becoming more comfortable with the idea of backing innovation at earlier stages, despite the sometimes significant cash-burning nature of these companies. Investors are probably reassured by the fact that the technology developed by some of these startups will be indispensable in the future: out of the French tech businesses that have recently raised tickets in excess of €50m, some are related to digitalisation of the healthcare sector (BioSerenity, Doctolib) and HR services (PayFit). Another common theme is online security, as seen with Vade Security and Shift Technology.

Although the venture space has undoubtedly matured, VCs and PE firms face a number of difficulties when investing in late rounds. Grossmann refers to both the risk of overpaying for stakes and the possibility of backing companies led by management teams that are not best equipped to oversee accelerated growth: "Founders of startups receiving growth investments need to know how to manage very quick growth. We are talking about businesses that increase their staff from 400 people to 1,000 in a year, like in the case of our portfolio company Meero. Managing the process isn't easy and there's little room for mistakes, given that the market is so dynamic and startup competitors rise quicker than ever before."

Now that French institutional investors have been spurred to fund late-stage tech businesses, managing growth and taking the fight to US rivals will be the biggest challenges for French VC and PE firms.

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