The French Startup Ecosystem: At a Tipping Point

I know, when thinking about hotbeds of startup innovation, France doesn’t exactly jump to mind. Sure, there are interesting things happening in European tech – in London, or Berlin (which I covered here). Or Finland. But France? Ask U.S investors and entrepreneurs, and you’ll hear more or less the same thing: high taxes. Impossible to fire people. Government intervention. Language barrier. Fear of failure. Strikes. The country of the the 35 hour law, where people are prohibited by law to answer email past 6pm.

Yet things have started to accelerate meaningfully in French early stage tech, particularly in the last two or three years. I was fortunate to be recently invited as part of a delegation of US VCs and media guests to spend a few days in Paris to meet with local entrepreneurs and VCs, as well as President Hollande and other senior members of the French government. As a Frenchman who has spent his entire professional career in the US, I’m perhaps more cynical than most about those matters, but I came back from my trip genuinely intrigued by the potential of the French tech scene.

For anyone who cares to look, the fairly obvious conclusion is that there’s a huge gap between perception and reality, when it comes to the French startup ecosystem. Very significant progress has been made on all fronts – more interesting startups, more funding, lots more talent rushing into the sector, improved legistation, etc. – yet the word has not caught on.

It is going to take a while to close that perception gap – if nothing else, because it takes a long time to overcome a negative reputation. But you can’t blame people outside France for being confused – France has been showing traits of schizophrenia in its approach to innovation and business success. For all its emerging crop of talented young tech entrepreneurs, most of France is still deeply ambivalent about business and individual wealth creation. French entrepreneurs are building great businesses, but often show a tendency for self-bashing and country-bashing. The current French government has been sending mixed signals (or has done a dramatic 180 degree turn, depending on how you look at it). Elected on a left wing platform, at first it showed signs of being anti business – including an ill fated attempt at raising capital gains tax, and a badly botched meddling into Yahoo’s attempt to acquire Dailymotion, a French competitor to YouTube. It now has launched a charm offensive towards the startup world both within and outside France, labeled “La French Tech” – first started by Fleur Pellerin, then Minister for the Digital Economy and now run by Axelle Lemaire, her successor since April

– both talented and in sync with a younger generation of French entrepreneurs.  All of this is certainly encouraging; time will tell whether this is a long term change of mentalities.

Here some thoughts – not meant to be a comprehensive review of everything happening in France of course or mention every single noteworthy person or company – just my notes.

Talent is French Tech’s Biggest Asset. France has had excellent engineering schools and a deep bench of technical talent for generations.   The big development of the the last few years is that many graduates of those schools are increasingly choosing to go work for startups (or start one) instead of choosing a career at Bain, Goldman Sachs or Total.  Many of those schools have launched seemingly very active incubators.  And this new generation of graduates speaks English a lot better than its elders.

One particularly noteworthy addition to the French educational system: Ecole 42, a new and highly innovative computer science school funded by a $100 million gift from Xavier Niel, France’s most successful tech entrepreneur. As far as I know their model is entirely unique: anyone can be admitted regardless of previous educational background (high school diploma not required). Past an initial online logic test, applicants go through a month long selection process involving a grueling 15 hours a day, 7 days a week routine. Those who are admitted to the school go through a curriculum that involves entirely team based projects, and are assessed through peer review only.  Oh, and it’s free.  The quality of the first class is said to be truly outstanding.

Big Data and Connected Devices. France tends to produce fairly original startups and comparatively few “copycats” of successful U.S. companies – for example Vente Privee pioneered the concept of online flash sales that was then imported in the U.S.. There are plenty of startups large and small in areas such as eCommerce (ShowroomPrive), video (Dailymotion) and music (Deezer, eDJing). But considering my specific areas of interest, I’m excited to see French startups excelling in Big Data and or math/data driven areas (think Criteo, Talend, Scality, Qunb, PriceMatch, etc.). France is also particularly innovative in the connected devices and hardware space (Parrot, Withings, Netatmo, Sigfox, Sense, Aldebaran, etc.).

Startups Dreaming Bigger: A common complaint against France (and indeed, most of Europe) expressed by US investors has been the relative scarcity of startups with truly global ambitions. In an environment where financing has been limited, many startups have had to focus on reaching profitability quickly, as opposed to focusing on scale. Also, French startups have historically focused on the French market, at least initially. Not that this is not a viable strategy: the market is reasonably large (65 million inhabitants), and large tech businesses have been built with a domestic focus – not least of which Illiad, Xavier Niel’s $17 billion ISP and cell network business. But it’s typically not what US investors are looking for, as their economics are driven by their ability to find hypergrowth businesses with true potential for $1BN+ exits, which are typically generated by startups conquering quickly very large markets.

This, too, seems to be changing, as the new generation of French startups seems to be thinking globally much more systematically, and much earlier in their development. Of course, French startups have had big international successes before (Business Objects, ILOG, Kelkoo, etc.). But there just seems to be a lot more French startups that are showing a strong international inclination – Criteo (which IPO’ed on the NASDAQ last year) derives at least 80% of its revenues outside France; rapidly growing ride sharing startup BlaBla Car is already present in 12 countries. Anecdotal conversations I have with French entrepreneurs indicate a clear desire to go international very early.

More VC Financing Options: While there’s still long ways to go compared to the U.S., there seems to be more VC financing options than ever before available to French startups:
• Seed financing: compared to other European countries, there seems to be more funds than individual angels at the seed fun: Elaia, Alven and Isai are names that come back frequently in conversations
• Early stage financing: Partech, Idinvest and Iris seem to be the main players.
• Growth financing: there seems to be a gap there, filled in part by London based funds (mostly Accel and Index)
• BPI France is an important (a strange, by American standards) player in the ecosystem. The result of an amalgamation of various state entities in late 2012, it is a VC fund (with 5 different funds), a venture debt provider and a fund of fund (with 56 partner funds).

Improved Regulatory Environment. This would be worth a separate  blog post, but here are some of the highlights of what was discussed during my recent trip to France:
• A startup can fire employees completely at will during their first 8 months of employment
• Past that 8 month period, French labor laws were relaxed in 2008 to allow firing in a broader range of situations, including “economic” situations where requirements or qualifications change – not quite the US situations but in practice, not a major issue apparently
• The 35 hour work week law, passed in 2000, was essentially amended in 2004 to the point of being completely voided of substance
• The 6pm email ban never existed and was the result of bad transation (see The Economist here)

Celebrating the rise of the French-American startup: Whether you call it a brain drain or a global partnership in the making, it’s hard not to notice the recent influx of French tech entrepreneurs in the U.S. Sure, a handful of French nationals have been prominent in the US startup industry for a while: Bernard Liautaud (Business Objects), Jeff Clavier (SoftTech), Loic Le Meur (Le Web), Fabrice Grinda (OLX), Tariq Krim (Netvibes now JoliCloud), Hubert Tieblot (Curse) and, increasingly, Renaud Laplanche (Lending Club) are some of the more obvious names. But the pace of arrival of French entrepreneurs has now accelerated to an entirely different dimension.

The French-American startup seems to come in three flavors:
• Startups founded by French nationals in the U.S.: for example Lending Club (San Francisco), (Palo Alto), Datadog (NYC), Placemeter (NYC), etc. Those companies often have no specific connection to France other the nationality of their founders.
• Startups founded in France by French nationals, that move to the U.S. very early in their development, sometimes after going through a local incubator like Le Camping (and then going through a U.S. incubator like Techstars): Sketchfab, Infinit, Doctrackr are some examples. Dashlane (in which my firm, FirstMark, has been an early investor) is another prominent example. Those companies often have their development teams in France and at least half of their management team in the U.S.
• Startups founded in France by French nationals, that reach some scale domestically first, and then move in the U.S. for growth expansion, for example: Novapost, Synthesio, Criteo
While one should be careful to not immediately assimilate this trend to “the Israeli model” (lots of nuances there), this dual structure (R&D in France and commercial operations in the U.S.) seems to work quite well.

This new generation of cross-atlantic startups should be celebrated. Seen from a purely French and short term perspective, this may not feel ideal: many of those companies will “flip” (meaning, transform from a French legal entity to a Delaware one, effectively becoming U.S. companies), and some entrepreneurs will become rich but won’t pay taxes in France. Long term, however, the benefits are immense – the vast majority of those French entrepreneurs will eventually come back to France, bringing with them deep entrepreneurial expertise, international connections and the financial means to be active seed investors in French startups, which will in turn hire people in France.

The key is here is to think of French tech as a globally distributed ecosystem, as opposed to a French one – many of French tech’s biggest successes will occur in the U.S. and, increasingly Asia.

NYC is a logical second home for French tech: while the Silicon Valley is the undisputed center of the tech world, NYC offers obvious advantages to French entrepreneurs interested in building global businesses: shorter flight, less of a time difference, arguably less of a cultural difference, and a younger, hungrier tech ecosystem where it easier to make a name for oneself. From that perspective, it was somewhat of a surprise to me when speaking to French entrepreneurs in Paris that they were most often thinking about the Valley as opposed to New York.

New York has a strong emerging French tech community: Fabrice Sergent (Cellfish), Mathieu Nouzareth (Freshplanet), Morgan Hermand-Waiche (Adore Me), Olivier Pomel and Alexis Lê-Quôc (Datadog), Alexandre Douzet (The Ladders), Gaspard de Dreuzy (Kapitall, Pager), Christophe Garnier (MommyCoach) and many others.  Some prominent figures of the NYC tech community have deep ties or strong interest in France, including Kevin Ryan (Gilt, MongoDB, Business Insider, Zola) and Ed Zimmerman (Lowenstein Sandler). This community is starting to gel quite nicely. The French consulate in New York (led by the new-ish consult Bertrand Lortholary) is starting to actively promote the French entrepreneurial community. And just this week, a new conference (La French Touch conference) is being launched and could become an important focal point.

What needs to happen next? Building a tech ecosystem takes generations (of startups). Companies need to start, receive financing, grow and exit. Founders and early employees need to contribute back their expertise and money (through angel investing) into the next generation of startups.  Large exits also embolden the next generation of entrepreneurs and VCs.  So France, like other emerging tech hubs, needs more exits.  However, it does have an incredible secret (or not so secret) weapon in the form of Xavier Niel – who invested 200 million euors to convert a former railroad depot into an incubator for 1,000 startups. This could be just the final touch that Paris (in particular) needs to get to the tipping point – this by itself should give a serious reason to US VCs to make Paris a must-stop destination on their tours of tech hubs in Europe.

Special thanks to Jerome Lecat (Scality) and Marie Ekeland (formerly of Elaia) for organizing our Paris visit, and to Philippe Collombel (Partech) for walking me through the Sentier and the Paris VC world.