
French tech investments in need of higher gear?

Although optimistic about the sector’s growth prospects in the coming months, French tech entrepreneurs claim capital is hard to come by. Do tech-focused venture firms need to step up their game? Greg Gille reports
What the French refer to as the "digital economy" - businesses, projects and infrastructures revolving around the Internet and computing - is currently growing rapidly across the globe, and France is no exception, as more and more companies try to benefit from the latest developments in e-commerce, social media and cloud computing.
Entrepreneurs in this sector are however finding it difficult to raise funds to finance their development. A barometer published by trade body ACSEL in March reports that 38% of tech companies are currently looking to raise funds, but 81% of those are struggling to do so.
"To a certain extent, we believe this is normal: not every start-up should be able to raise funds easily," notes Nicolas von Bulöw, a partner at tech-focused corporate finance firm Clipperton Finance. "I'm more worried about good businesses being unable to attract sizeable investments. France is one of the European countries where seed and early-stage financing is easiest, due to the FCPI and FIP structures - the issue lies with follow-up financing."
France is indeed not lacking in venture firms specialising or willing to invest in the tech sector. Alven Capital, for example, has been particularly active this year with eight investments; it notably participated in a €6.6m funding round for marketing software company Mobile Tag and also contributed to a €3m investment in online media agency MakeMeReach. Other actors active in the sector include ISAI (which closed its maiden fund last year and has completed a deal per quarter since) and Xange Private Equity.
According to a study on French PE activity published by trade body AFIC, the IT and computing sector attracted the largest number of investments in 2010, with 312 companies receiving funds from GPs - a testament to both the sector's health and its attractiveness to venture firms. But it also displayed the lowest average investment of the sample with a €1.79m average equity ticket.
It would seem that France is not necessarily in need of more tech investors, but that the capital needs of the companies in this sector are evolving and may not always be in tune with the French venture model. Says von Bulöw: "French players are more geared towards €0.5-4m tickets for tech investments, when there is a trend for larger capital requirements in this sector. Although web-based activities were not capital-intensive in the past, this is changing as increased competition pushes investment in marketing and traffic acquisition. This is where the French financing gap lies: there are no tech-focused funds able to follow on with tickets in excess of €10m on still risky businesses."
In an effort to alleviate the difficulty for tech entrepreneurs to raise capital, the French government recently announced the launch of a €400m fund designed to back innovative companies operating in eight areas of the technology sector, including cloud computing, e-education and network security. The FCPR vehicle will be managed by CDC Entreprises, an established GP that already manages several funds and funds-of-funds on behalf of the Caisse des Depots et Consignations.
But given that its equity tickets are not set to exceed €10m, it may not provide a quick fix for the aforementioned financing gap. "The idea is good in principle, as it will enable more companies to get access to capital," says von Bulöw. "But I fail to see how the fund's remit is different from all the other tech funds, and how it will facilitate the emergence of more powerful French actors in this sector. We will need to see their strategy in the coming months." That said, the fund would only co-invest and could therefore help syndicated funding rounds break the €10m mark.
France could also benefit from the increased appetite displayed by Anglo-Saxon VCs for European tech businesses, as they try to avoid the fierce competition taking place in the US for such assets. "For large tech investments in France, Anglo-Saxon investors look more dynamic at the moment," notes von Bulöw. "They have come back aggressively in France and the rest of Europe - what is different compared to the early 2000s is that they intend to develop the businesses locally instead of taking them over to the US straight away." The larger tickets that these investors could bring to the table might be another way to further strengthen a vibrant French tech scene.
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