France’s Uneasy Relationship With Start-Ups

Never before in the country’s history have there been so many successful global companies being built in France.

Criteo, an ad tech company, went public on NASDAQ in 2013 and has a market cap of $2.4 billion. BlaBlaCar, an inter-city ridesharing company, raised a $100 million round in August and has so far expanded into 13 countries. Devialet, which makes high-end audio equipment, is looking to unseat Bose. Sigfox, an Internet of Things carrier company, expects to be present in some 20 countries this year and is about to announce a huge funding round.

France continues to stunt start-ups’ growth

Products made by Withings, a consumer electronics company that has gone global from a suburb of Paris, are prominently displayed in Apple stores around the world and are now being sold as part of the Google Fit Developer challenge for Android devices. Criminal Case, a game designed by Paris-based Pretty Simple Games, has been played by more than 120 million people and is ranked as one of the top ten games on Facebook. When it launched on iOS three months ago, it became a top five global free app in less than three days.

France is also home to flash sale giants and, as well as a stable of companies growing at 50% or more per year with solid revenues, such as Lengow, Linkfluence, Adyoulike, and Jahia.

France also has the largest number of companies in the 2014 Deloitte Fast 500 ranking, says Guillaume Prunier, a member of the ministerial cabinet of France’s Minister of Economy Emmanuel Macron and an advisor for entrepreneurship, innovation and SMEs to France’s Deputy Minister for Digital Affairs, Axelle Lemaire. “There are 86 companies that are French. The second is the UK with 71.”

But despite that, the paradox is that although reforms over the past few years have made France a good place to start a company and thousands of young French people are now choosing to become entrepreneurs, the country remains one of the worst places to grow a company, according to prominent members of France’s tech ecosystem.

“We are in an economy that is the result of an industrial strategy focusing on the biggest existing players for the past 40 years,” says venture capitalist Marie Ekeland, co-founder and co-president of France Digitale, a French lobbying group comprising entrepreneurs and investors. “Our champions in the CAC 40 [the top listed French companies] are very old — 101 years old on average — and poorly digital. Our growth ladder is broken.”

While French government officials, such as Prime Minister Manuel Valls and Macron, have begun publicly acknowledging for the first time that young tech companies will be the engine of the economy in future, the government has yet to tackle the serious underlying issues that continue to hamper growth companies, says venture capitalist Philippe Collombel, a co-managing general partner at Partech Ventures and a founding member of France Digitale.

Despite the encouraging words of the French government, the current political framework and timing make any concrete actions very difficult, he says. Indeed, some divergent political currents have appeared within the ruling Socialist Party. Furthermore politicians are now focused on the next Presidential elections in 2017 rather than on passing new legislation. “There are people within the government doing all they can to move the needle but I am afraid things won’t change in the near future because there is a huge divide within the French authorities and it is not a question of left or right,” says Collombel. “A lot of the people on the Right don’t believe [in the tech economy] and they are not interested. This is why VCs are very upset and worried,” he says.
Long-standing issues such as inflexible labor laws, high taxes and social charges remain problematic.

Ekeland: Our growth ladder is broken

“We are used to swimming with weights on our legs,” Benoist Grossmann, a partner at French venture capital firm Idinvest Partners, an investor in Criteo and Withings, said earlier this year.

Labor laws in France comprise some 3,600 pages and 200-300 pages are being added each year, says French Internet entrepreneur Pierre Chappaz, the founder of two successful companies in France: Kelkoo, which was sold to Yahoo, and eBuzzing, which has merged with Teads to form a global ad tech company headquartered in Luxembourg that is expected to go public in 2015.

“Nobody can understand all these regulations so you have to pay expensive fees to lawyers in order to do anything,” says Chappaz, who moved to Geneva in 2000. And, he argues, all of that bureaucracy is ineffective.

Two new laws make it even harder for young companies to expand and contract: there is now a strict limit of the number of interns/trainees a company can have and limits on the duration of any part-time employment agreements.

“France needs to understand that flexibility is a possible word, it is an enabler,” says Cédric Hutchings, co-founder and CEO of Withings, a maker of wellness and digital health devices.

Capital gains taxes are another issue. Chappaz complains that while a 2012 protest by the French tech sector prevented capital gains tax rules from getting worse, the current system is still byzantine. “It is impossible to understand which slot you are in and what level of taxation you can expect,” he says. This is just one of many reasons “most of French entrepreneurs I know do not live in France anymore and I know no foreign entrepreneurs who want to install themselves in France,” says Chappaz, adding that he has no plans to return to his native country.

The image France projects is a real deterrent, say industry observers. Idinvest’s Grossmann describes how, whenever he meets U.S. investors, he is asked to explain the 35-hour workweek, five weeks of vacation and the French government’s blockage in 2013 of the sale of a controlling stake in Dailymotion to Yahoo.

Very few people realize that France has become a good place to start a tech company, even when it comes to tax and social security, says Collombel. The legal status of “young innovative companies” (Jeune Entreprise Innovante — JEI) provides a number of tax and social security exemptions for SMEs when at least 15% of their costs are for R&D. What’s more, and this is cumulative with the JEI, companies that incur expenses for basic research and experimental development can benefit from a tax credit, the Crédit d’Impôt Recherche (CIR). It gives start-ups a 30% tax credit on their R&D expenses without a cap. This is the best deal start-ups can get just about anywhere, says Collombel.

“With these two regimes French engineers should cost roughly two times less than a Silicon Valley-based engineer,” says Ekeland.

But many companies that take the CIR often receive — within a few weeks — a notice that they are being subjected to a tax audit, so companies are reluctant to take advantage of the law. “There is no trust in the system,” says Collombel.

Entrepreneurs in France work long hours, seven days a week just like everywhere else; the stories about restrictions on viewing email after hours (proposed rules contained within a sector-specific labor agreement in France only affecting about 250,000 workers in consulting fields and not all workers, as reported in the British press) simply don’t apply to people working at start-ups. But industry observers told Informilo the limitations on foreign investments in French start-ups have gotten worse following a decree issued by former Minister of Industry and Economy Arnaud Montebourg in May 2014.

Collombel: Government yet to tackle the serious issues

Many countries, including the U.S., restrict foreign ownership in strategic industries such as telecommunications. The difficulty with the Montebourg decree is that it widened the definition of what can be considered strategic while leaving it vague. “The list of strategic businesses has been extended and now targets certain start-ups,” says Delphine Villuendas, general counsel for Partech Ventures and France Digitale. “The definition of the scope is not clear enough and the risk in case of breach is so high that this is becoming a red flag for foreign investors.”

In its recent report “When France Wakes Up,” U.S. bank J.P. Morgan wrote: “We believe France is overburdened fiscally, overprotected socially and overregulated commercially. As a result, economic growth is weak, fiscal deficits and public debts are high, and unemployment is structurally elevated. France has significant comparative advantages and can boast plenty of globally competitive companies. Yet, there is an urgent need for the government to accelerate and broaden its efforts to implement a comprehensive reform program and a credible medium-term fiscal policy.”

Should I Stay Or Should I Go?

Doing business in France is tough, acknowledges Ludovic Le Moan, CEO of Sigfox, one of the country’s rising tech stars. The company, which is building a low-cost, alternative cellular network for connected objects, was able to sign major contracts outside of France but it took three years before it could get its first big win in its home country. “If we depended on business from France we would be dead by now,” he says. Labor laws are an issue for the company, as are rules on stock options. “To motivate the employees we need the upside — the stock options — we need to have something very good at the exit; this is something that must be improved,” says Le Moan.

Lack of access to growth capital remains a huge issue. Although a government matching fund within an organization called the Bpifrance has been set up for late-stage growth companies within France, it is not enough, say industry observers. That alone could push companies like Sigfox to leave the country.

“We want to be a global carrier of Internet of Things devices. We have very ambitious plans but we need to raise the right amount of money,” says Le Moan.

“I’d like to stay here; I’d like to prove it is possible. But if the new shareholders are American and they tell us the condition is to flip to the U.S., we will do it.”

Lack of exit routes also remains a problem. To date Euronext, a pan-European exchange with branches in Paris, Brussels and Amsterdam, has mainly been used to float biotech companies but Eric Forest, president of EnterNext, the Euronext exchange for small and medium-sized companies, announced several initiatives on November 17th to encourage more tech companies to go public in Europe. These include more analyst coverage (via a deal with independent investment research firm Morningstar) and a Fast 50 program similar to one launched in the UK. However, lack of retail investor appetite and sector knowledge, coupled with lower valuations than those offered by the New York exchanges, remain major challenges, which is why venture capitalists interviewed say companies like Criteo list on NASDAQ.

In addition to the potential restrictions on foreign investment, trade sales are difficult in France because in its own market there are very few local players capable of integrating a start-up into their own operations. Furthermore, legal instability is causing potential international buyers — the subsidiaries of large foreign companies — to flee France, says Collombel.

What’s more, the Loi Hamon, a package of employment legislation enacted in July of this year, stipulates that the owner of a company must inform every one of his employees, and any new potential hires, at least eight weeks before selling a company. The penalty for failure to comply is the cancellation of the sale. It is difficult to imagine how that could be applied: can a French court go after former shareholders and force them back into a company?

And France’s wealth tax remains a deterrent for successful entrepreneurs. It discourages the wealthy to stay in France as it creates a complex and expensive tax system, with up to 75% tax on all new income,, says Pascal Gauthier, a former COO of Criteo. Although he has moved back to France his current venture, Challenger Deep, is headquartered in London.

Cause For Optimism?

Still, there is some cause for optimism, say venture capitalists and entrepreneurs. “France has some of the most well-respected engineering and business schools, the productivity of French start-up employees is amazing, it has a swelling population of serial entrepreneurs and active early-stage VCs,” says Collombel, who despite his concerns remains bullish about the sector. (Partech is opening a nine-story building in central Paris in December to connect France’s start-ups with big corporates.)

A 2014 study prepared for the European Commission by France Digitale found that France is the top European market for early-stage investments with 35% of all European deals ranging from $500,000 to $2 million taking place in France, says Villuendas.

Ekeland, a board member of Criteo who recently left French venture capital firm Elaia Partners, says she sees lots of potential in the local market and is raising a new $100 million fund aimed at early-stage European start-ups, including French companies.

“We now have entrepreneurial role models in France who show the way such as Xavier Niel from Free/Iliad and Jacques-Antoine Granjon from,” says Ekeland. What’s more, she says, Criteo has demonstrated that you can build a global leader from Paris and compete with the best U.S. players in ad tech, a historically Silicon Valley-dominated field.

Ekeland points out that although more progress is needed there have been some concrete actions by the government in the last two years, including a €30 billion decrease between 2013 and 2017 in taxes and social charges on business through Pacte de responsabilité and Crédit d’impôt pour la compétitivité et l’emploi (CICE); some capital gains taxation reforms; abolition of a rule that labeled failed entrepreneurs as ineligible for credit from banks; an obligation on public school teachers to teach entrepreneurial skills; enlargement of the definition of innovation to include usage, design and business models and not only technology and science; the issuing of entrepreneurs’ and developers’ visas; the launch of La French Tech to gather the ecosystem and promote it at the international level; a law proposed by Macron that would enlarge the so-called “BSPCE regime” (start-up stock options system); and a reform of the free shares and performance shares regime to be able to attract talent to join growth companies.

“We are not saying things are fine, absolutely not,” says Prunier, a member of the French ministerial cabinet. “Entrepreneur is a French word but entrepreneurship is not any more in the minds of all of the French people. That is why we have put a reform of the stock options in the Macron law. It is a first step. If people have shares in their own firms then they will understand what entrepreneurship is.”

The reforms have come about largely thanks to France Digitale, following protests two years ago by a group called “Les Pigeons” (French slang for suckers), which was formed to express opposition to an initiative by the government to tax capital gains as salary.

Until the very vocal protest by “Les Pigeons” VCs and entrepreneurs “were ignored by politicians and the general press,” says Jean-David Chamboredon, CEO of ISAI, a micro-VC fund seeded by French web entrepreneurs. This is no longer the case. Plus, he says, the tech ecosystem in France, “has been unified and this is major progress.”

While agreeing that change will be painful and long, Chamboredon remains upbeat. He is currently raising a successor to his first fund that will aim at “leveraging the diaspora” — assembling French entrepreneurs now living in San Francisco, New York, Shanghai and London “so that if you are a French entrepreneur we will be able to help you expand everywhere on the planet.”

The local market alone can support great tech businesses. Just ask, the French company that pioneered the flash sales model in 2001 and today has annual revenues of $2 billion. Fintech could also prove to be a lucrative market for local start-ups. Entrepreneur Olivier Goy hopes to capture part of the multi-million-euro loan market in France with a new start-up called Lendix and then expand geographically. “Even if I know France is described as a difficult place for doing business you can have great success stories here,” says Goy, who in addition to launching Lendix, backed by Partech Ventures, runs a France-based €1.2 billion private equity fund called 123Venture that invests in European companies. “Everything is possible as long as you innovate and try to think differently.”

The good news for France is that a growing number of companies are taking up that challenge and despite the odds and the obstacles imposed by the government are managing to scale not just in France but globally.



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