Are French VCs financing innovation ?
This post focuses on early-stage deals and investments in pre-revenue French ventures.
Avolta Partners monitors Venture Transaction Multiples (#VTM) in the VC French ecosystem (soon in Europe!). We share financial insights to investors and entrepreneurs who believe in a data-driven approach to startup finance.
A lot of founders expect their first shareholders to finance innovation and product-market fit.
Here are three reasons for entrepreneurs to mitigate their hopes:
1/ The journey is long to get to first financing rounds
Almost 4 years to Seed and 4 years and a half to get to Series A on average
VCs rarely help to find a product-market fit. Entrepreneurs should focus on love money and business angels to consolidate a decent VMP and prove traction before accessing to institutional investors.
2/ There are very few deals where ventures are pre-revenue
39/498 monitored French deals in 2015 to be precise, less than 8%.
66% of these pre-revenue deals are in the MedTech/BioTech and the CleanTech sectors, where massive investments are necessary before traction might be proven. And even in these sectors, deals are concentrated in seed and series A, with few ventures accessing to series B without showing revenue.
For the lucky ones convincing investors without revenue, they may not expect a valuation superior to €10m — and €5m for consumer services.
3/ Not all sectors are equal
If we compare the typical deal size and median revenue per sector, we outline industries in which VCs are most likely to finance traction and where growth is capital intensive.
a) Consumer Services & Digital: The average deal size is outstandingly high compared to venture’s revenue. This is explained by a few large rounds and a strategy to consolidate monopolies.
b) FinTech & IoT: VCs finance intensive rounds and bet on the outstanding growth from the overall industry. Entrepreneurs benefit from the investor momentum.
c) CleanTech & MedTech/BioTech: Investors are most likely to finance pre-revenue ventures in these sectors since associated business models and patents hedge their risks.
Eventually, adtech, ecommerce and retail seem difficult industries for startups to raise funds without steady revenue.
Conclusion
Venture capitalists finance innovation and traction only when they expect them to represent profitable investments. So one should keep figures in mind when sorting promises from investors.
