The French government is extending the so-called Montebourg decree adopted in 2014 to regulate foreign takeovers of firms in the energy supply, water, transport, telecoms and public health areas. The decree, which will now come under the Action Plan for Business Growth and Transformation (Pacte), encompasses sectors including artificial intelligence (AI) and data storage. For French start-ups in these fields, which still rely heavily on foreign investments to scale up, the announcement is bad news. 

“I think we should be careful with the message we send out to the world and be a bit more specific,” says Rachel Delacour, who co-heads France Digitale, an organisation representing French start-ups. “Telling foreign investors they won’t be able to invest in some strategic start-ups that are deemed vital to the country is one thing. Telling them they won’t be able to invest in our start-ups simply because they use some form of AI or have launched an algorithm to analyse data is another. The risk is that we end up with no foreign investment at all.”


France’s Ministry of Economy and Finance acknowledges the issue. Contacted by fDi, a spokesperson said that the ministry “failed to clearly explain what it aimed to do in the first place”, and added that the goal is “obviously not to prevent foreign investors from investing in French start-ups”.

VC dependence

France cannot afford to scare away foreign investors. A recent report published by Chausson Finance, a boutique investment company focusing on venture capital (VC) fundraising for start-ups, shows that foreign VC firms were present in 52 rounds of fundraising in France in 2017. This represents an increase of 60% compared with 2016, with US VC funds taking the lead and being particularly active in the transport, AI and fintech sectors. 

The participation of foreign investors is even more important for firms looking to ensure their operational development, recruit top-level executives or even expand abroad, and which need to access larger rounds of funding to do so. In a report published in September 2017, EY and France Digitale noted that 79% of the French start-ups raising more than €50m in 2016 relied on at least one foreign VC. By comparison, only 32% of the firms raising between €5m and €50m had to tap into the foreign VC market.

“We’ve seen the French VC market grow significantly over recent years, and local VCs are now able to take the lead on investments of up to €15m to €20m,” says Christophe Chausson, founder of financial consultant Chausson Finance. “However, above this level, the equity gap is still important and the French start-ups that have managed to secure more than €40m in funding did it thanks to UK, US and Chinese investors.”

The funding gap

French firms such as Idinvest Partners and Partech Ventures are currently trying to fill the gap. Partech, for example, closed the fundraising of its International Ventures VII fund with $450m under management in June 2017, with a view to helping start-ups with high growth potential to access the funding they need. 

For its part, Idinvest finances SMEs typically in the range of €10m to €40m via its Idinvest Growth Fund II.

However, above the €40m threshold, the equity gap remains. The reason lies in the cultural mindset, French fundraisers claim. Broadly speaking, VC funds in the US have always been willing to pump huge amounts of cash into start-ups in the hope that they would become the cash cows of the future. European investors, by comparison, have adopted a much more prudent approach and would expect their start-ups to generate stable revenues before they can raise large rounds of funding.

“On the one hand, there are the very profitable companies, with a positive EBIT [earnings before interest and taxes], in which case some French private equity firms can raise €100m to €200m or more,” says Omri Benayoun, a general partner at Partech who is responsible for the growth fund. “On the other hand, for companies that are still growing and which have a negative EBIT, raising €50m or more will be difficult. French investors are simply not used to this model.

France’s attractiveness

In the US, the bulk of the money goes towards marketing, new business ideas and, more importantly, wages. “If you look at the US market, the competition for talent is extremely high and it’s mainly concentrated within the giant tech firms,” says Nicolas Cellier, co-founder of Ring Capital, a French VC which invests in fast-growing digital scale-ups. “Start-ups will therefore need to pay a lot to attract the talent they need.” 

This in turn explains why US investors are so keen to invest in France, where they can find the right talent at a much lower cost. 

But greater even than the low wages, a key reason for France’s attractiveness is to be found in the start-up exit strategies. Even though the number of exits remains limited compared with the US, the recent successes recorded in the country make foreign investors confident that they will be able to capitalise on their investment. The sale of image analysis start-up Regaind to Apple in September 2017 for an undisclosed amount or even the sale of the social mapping app Zenly to SnapChat in June 2017 for $213m are the proof. 

However, the French government’s initiative to control foreign investments in AI and 'big data' could dramatically restrict those exit opportunities. 

“If I were in a position to sell my company now, the government’s announcement would be a deal-breaker because the investor would have every right to say: ‘Listen, this is way too complicated, there are other start-ups we are looking at, so let’s forget about your business’,” says France Digitale’s Ms Delacour, who herself co-founded BIME Analytics, a start-up sold to Californian firm Zendesk in 2015. 

Local investments

The question at this stage is how to enable local start-ups to scale up with French investment alone. According to Ms Delacour and the team at France Digitale, the solution lies in life insurance savings. 

“There is a big life insurance savings market in France, which is up to €1600bn,” she says. “Only a small part of those savings is directed towards risk capital. If we managed to redirect a larger part towards French start-ups, we could easily allow our companies to grow with French money only.”

But persuading the French to invest in risk capital through their life saving products would take some initiatives such as tax incentives, which the government is unwilling to pursue. 

Instead, minister of the economy Bruno Le Maire is pushing for the introduction of the Pacte law, which aims, among other things, to incentivise French workers to save through pension schemes. 

The reason for this is simple. Unlike life insurance contracts, which invest mainly in sovereign bonds, pension funds invest in the real economy and directly provide capital for growing companies. 

The move will necessitate a complete shift in mindset, however. Traditionally, the French have accumulated large saving pots either to access the first-time buyer property market or even to secure their retirement income, and show little appetite for risky investments. This explains why pension funds in France have collected only €200bn in savings, a small amount compared with life insurance products. 

Fund creation

Another solution, according to local experts, would involve pushing for the creation of sovereign wealth funds. “Those funds would have the capacity to take the lead on larger rounds of funding,” says the head of one French investment agency.

In 2013, the previous government set up Bpifrance. This is a French state-backed investment vehicle (not a sovereign wealth fund as such), and invests anywhere between €5m to several hundred millions in French SMEs.

However, Bpifrance never takes the lead on investments. A spokesperson explained that Bpi has never sought to invest on its own and will always partner up with other investors.  

As to whether the government is willing to launch any true sovereign wealth fund, a spokesperson for the Ministry of the Economy declined to comment, but fDi understands that no such plan is in the pipeline.