Why French BAs and Large Corporations, should invest in Startups

After some years as an entrepreneur in San Francisco, I moved back to France to join Elaia Partners, a leading European early stage tech VC firm. I thought the French startup ecosystem had reached a solid level of maturity, boasting talents, ambition and opportunities. 6 months down the road, I’m not disappointed: France’s startup scene has indeed matured at an impressive pace and is now poised to global success. I had to share the love, and so I did in my previous paper. Yes, the French startup ecosystem rocks!

But I did not spend the last 6 months only enjoying subtle wines on fancy terraces… I also investigated the flip side of the ecosystem; and it’s not entirely brilliant. Serious weaknesses might hamper the large scale success the French startup scene deserves - and that France needs.

The Incompleteness Of The Financial Chain

· 100% year on year growth between 2014 and 2015
· First in Europe in terms of number of deals during H1 2016
Steady growth of funding in French startups. Source EY

At first glance, things are doing all well! The above metrics are two enviable Key Performance Indicators. The French startup scene is funded and its funding is growing.

But there is another gloomier reality: the funding chain is incomplete. There are major shortcomings at both ends of the chain: pre-seed and exit. French VCs are getting stronger, more mature and more potent, but the weaknesses at the earliest and latest stages of the chain might hinder the long term, sustained growth of the ecosystem; they need to be addressed.

1. Where Are The Business Angels?

The level of funding at very early stage (Business Angels) is 50 to 100 times lower in France than in the US, for an economy that’s only 6 times smaller. In the UK, an economy of comparable size, there are 5 to 10 times more Business Angels than in France. What a painful gap!

People don’t play the Business Angels game for the digital economy in France as they do in the US or the UK.

Of course there are exceptions: successful entrepreneurs of the digital economy are also BAs of the digital economy (thank you all!). But there is a deep chasm between the wealthy people whose assets come from the traditional economy, and the digital world. Between the old and the new economy, in blunt terms. It’s not a matter of lack of money — France is rich! — it’s a matter of how resources are allocated.

Some analysts suggest that this problem needs to be addressed from a fiscal standpoint: making investment in startups more attractive through appropriate tax regulations and incentives. There is a point here. Obviously.

Conservatism: Why Play Exotic?

And there is more: it’s also about conservatism; in France, many family assets come from inheritance rooted in long histories that younger family members will minimally expose to innovative investments.

Investing capital in innovative startups of the digital economy”: there seems to be as many cultural barriers as there are words in this sentence.

In the US, professionals from the traditional economy — doctors, accountants, shop owners, architects, realtors, execs of big groups; anyone actually — invest (a measured part of) their wealth into the digital economy. They do it as the best way to prepare the future; with no notion of traditional assets to be for ever protected and transmitted. And they make money out of it! Investing in the digital economy is considered a necessary and profitable opportunity in the US, while it’s still primarily considered an unnecessary, exotic risk in France.

Understanding Digital Tomorrow

In addition to this cultural conservatism there is also a widespread ignorance of the digital thing - and what is at stake. The French startup scene, however sparkling it is, is still considered by too many poeple as a niche game played by nerds and fashionistas. Many people don’t comprehend its strategic value; many people still believe it’s a parallel world living by its own rules while the good old world will forever survive in its insulated immunity. Alas. The digital revolution, whether we want it or not, whether we like it or not, is reshaping the whole world ; and there is no going back. Understanding it is a duty. Investing in it is an opportunity!

When French BAs will participate to the digital economy on par with their American or English peers, France will accelerate way stronger.

And I know this will happen, because this is, largely, a generation issue!

2. Enter (Slowly) The Large Corporations

Beyond this super early, BA-level stage problem, there are also shortcomings at the other end of the the financial chain: the absence of a Nasdaq-like, tech-dedicated stock exchange; and a weak domestic M&A scene.

Indeed, for the complete financing chain to work, startups and their VCs need exit options, and therefore an active M&A scene. But why should large corportations be more active in the financing or acquisition of startups? Out of philanthropy, as a marketing opportunity to please the Y generation? No. For their mere survival. As much as startups need large corporations to complete the financial chain, large corporations need startups just to stay in the game.

Why are startups so critical to the survival of large corporations ? Because there are two fundamental differences between today’s digital revolution, and the previous economic revolutions :

  • Pervasive connectivity. Hence, openness: no one can walk an independant path, oblivious of the rest of the world anymore: economic agents are interconnected and have access to countless options and unlimited information. To innovate, corporations need to open up.
  • Speed. Digital innovations occur way too fast for organic adaptation to follow the pace. In a Darwinian economy, large corporations (which cannot run fast by structure) cannot just wait for their natural mutation: they need cross-polenisation to accelerate their evolution.

Survival of the fastest. Large corporations need to engage with startups to catalyze their mutation at the required pace. And this entails allocating substantial financial resources, in funding and in acquisition.

I meet many execs of large corporations; they obviously understand the point from a top-down, global, thinking standpoint. But there is so much more to do from a bottom-up, pragmatic, action standpoint.

The M&A Equation

Large corporations need to learn how to acquire startups; how to detect, assess and integrate them.

They typically need to understand that the classical rules of doing business do not apply to this particular context: P&L, discounted cash flow, org chart or client backlog are bad proxies for the valuation of startups. Acquiring a startup with a negative EBIT is not about capturing a distressed asset ; it’s about acquiring an agile and innovative culture that will, if intelligently digested, percolate and stimulate the organization; it’s about filling gaps in product road map at unbeatable paces. It’s about making a bet on a vision: a bet somewhat similar to what VCs do, but with the considerable advantage of being able to contribute to the eventual success, through various commercial and industrial levers and synergies — and a controlling stake.

Things are moving, though. We should not expect short term miracles — it’s a long uphill road — but there is a solid trend towards more involvement of larger corporations in the digital startups scene.

Whether out of plain love for innovation, or by mere survival instinct, large French Corporations are entering the startups scene. And as much as the French startup scene is shining, France also boasts an enviable collection of world leaders in the heavy weight category; champions of the traditional industries — energy, construction, retail, food, automotive, airspace, finance, tourism, that are engaging with startups.

They’ll succeed, and with them the global ecosystem will thrive, if they do it for cultural reasons as much as technological or economical reasons; and if they do it with sizable, genuine and long term commitment.

Optimism wins

The finance chain needs to mature if we want to transform France’s startups scene into global winning machines. Investing in the digital economy is investing in the future and France hasn’t yet deployed sufficient resources to this challenge. But let’s do justice to the positive signals :

  • Education and communication efforts are happening! Particular praise to France Digitale which has been so instrumental in bringing digital awareness to the French society and its government; and please do not miss the upcoming France Digitale Day!
  • The number of Business Angels is also growing faster than the economy itself (and they make profit, too)
  • Although it would be brave beyond reason to make a sure fire bet when politics is involved, it seems that the fiscal aspect is moving to the right direction too!
  • And finally, most larger groups are now actively engaging in startup-related initiatives, as demonstrated by the growing number of accelerators, incubators, and other innovation-related structures
France Digitale Day


We are not there yet. We need to convince BAs and large corportations to complete the financial chain. We need to convince them that the digital thing is not a game but a world changing revolution, and that France must, and can, take a leading role; we need to explain how investing in the digital economy is necessary, meaningful, exciting. And profitable.

When the fuel will match the talent, success will be ours.