Time To End French Seed Funding Subsidies?

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In May 2016, I sat around a large table in a Paris café with about a dozen foreign journalists eating a light French breakfast and listening as then Digital Minister Axelle Lemaire provided an overview of the government's startup strategy.

Her presentation covered many facets, but one in particular stuck in my mind: financing. Government plays a heavy role in France's economy, and that extends to startups to the tune of billions of euros. Back in 2016, that would have been even more controversial for anyone (including journalists) hailing from libertarian-loving Silicon Valley where the g-word ranks among the dirtiest and the so-called Free Market is the ultimate deity. To favor any role for the government was heresy.

The problem in France, according to Lemaire, was that the country's private risk financing sector was too far behind and too anemic compared to other regions. If the country waited for the same evolutionary forces that made Silicon Valley the global VC epicenter, it would continue to miss wave after wave of innovation and fall further and further behind in the entrepreneurial race.

"The way companies are being financed in France, it's all about access to banking," Lemaire said. "It’s not the way companies in Silicon Valley are being financed. 70% of financing of startups in France is coming from banking. And it's more difficult after the financial crisis for banks to invest in risky investments."

So the government decided it needed to catalyze its venture capital community through a variety of investment schemes. One of the most notable is the Fonds National d’Amorçage, a fund of funds destined to pump more than 1 billion euros into seed funds which would then back a greater range of the earliest stage startups.

Last week, Bpifrance, the country's national bank, released a report card on the performance of FNA. Based on the data points provided, the program is arguably a big success. That's important because the government must now decide whether to renew it. During that process, Bpifrance will likely face some tough questions.

But as I thought back to the Lemaire breakfast, there was one fundamental question that occurred to me: Do French VCs and startups still need such a program? If the goal of the program was to jump-start France's seed funding scene, then surely it's greatest barometer of success would be that it's no longer needed. Rather than being a criticism, ending the program might the highest compliment one could pay.

With the seed funding market in France soaring (and with some even arguing it's getting overheated), renewing the FNA is neither an easy or obvious choice.

FNA By The Numbers

First, let's look at the figures that BPI released. The FNA includes 2 funds, one started in 2011 and one in 2016. The goal: "promoting the emergence of a new generation of seed funds managed by professional management teams, with the aim of supporting young innovative companies in the starting phase."

"The FNA has largely exceeded its objectives in terms of leverage and support for deeptech startups across the country," said Nicolas Dufourcq, CEO of Bpifrance, in a statement. "French Tech entrepreneurs now have access to a large panel of seed funds managed by professional investment teams, which have demonstrated their ability to identify and support the technological champions of tomorrow."

Of the 1.1 billion euros of available FNA funds, 755 million euros have been committed to venture funds, and 345 million euros of that has been invested in startups. That money has gone to 37 funds being managed by 19 VC firms. The recipients include such firms as Elaia, Frst, and Partech. That money, in turn, has found its way into a host of big French Tech names including Ornikar and Ynsect. It also backed four companies that are now unicorns: Alan, Mirakl, Shift Technology, and Jellysmack.

On the question of leverage, the FNA seems to be making progress. Those funds that received FNA money are managing a total of 1.7 billion euros. Overall, FNA accounts for 44% of their money. But, that has dipped over time, from 48% between 2011-2016 to 38% between 2016-2021. As for the startups, for every 1 euro that trickled down from the FNA, the startups raised another 18 euros.

So this may be the crux of the dilemma going forward. These funds and startups are increasingly successful at attracting outside funding. At the same time, even 38% represents a pretty substantial chunk of the Seed funds.

What may tip the scales is the performance of these funds, and Bpifrance doesn't really provide enough information to judge that. It does note that 55% of the funds that took money have reported a positive return, but that's a low bar in terms of convincing other sources to invest.

Seed Rounds

What we can say is that France at the moment is not lacking for Seed funding. A few months ago, I was interviewing two VCs who were complaining that while they would like to start investing in the French market, the competition for deals has become intense and the valuations too high to justify.

And over the summer, Sifted.eu noted that the average size of a Seed round deal was growing much faster than the overall European average. While France was right at the European Seed average in 2017, it has since accelerated. So far this year, the average Seed deal in France is 2 million euros compared to 1.5 million euros for Europe (boosted by a $24 million Seed round for Sunday).

Just how much more stimulus does this market need? One could argue that because venture funding around the world is exploding, France can't afford to lift its foot off the pedal now. And no doubt, for some of the funds demonstrating weaker performances, the loss of the FNA could be fatal. But who wants to be shoveling money at firms that can't manage it properly?

Part of the argument for renewal from Bpifrance appears to be the FNA's impact on Deep Tech. The report emphasizes the amount of money that flowed to research-based startups, an area where France (and Europe) believe there is tremendous potential for game-changing startups. But Deep Tech requires a longer-term investment horizon to allow the research to be refined and products to be developed. Perhaps this subset still justifies greater state support (though Bpifrance also manages a 2 billion euro Deep Tech fund).

The government must now study the future of the FNA closely. But the next step isn't obvious. There is a risk of causing the market to overheat. There is a risk that withdrawing support could cause Seed funding to collapse, or for VCs to become far more conservative.

The default response will be to renew the fund because it's often hard to turn off the government spigot once it's been opened. But the question of whether to continue the FNA deserves some serious reflexion rather then a snap judgment. The French ecosystem has dramatically matured and the government needs to have the courage and foresight to adapt policies – especially ones that have shown past success – to the new reality.

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