How to survive the
pre-bubble times in France?

Last week, a member of our team was pondering as to whether or not we should be attending the next First Tuesday session in London. This single question suddenly brought me back 15 years in the past…..

… back in 2000, the First Tuesdays was the place to be for a 25 year old French entrepreneur justifying to famous bankers why they should invest 10MF (!) in an idea they had come up with the day before…At that time, allegedly, the same entrepreneur would have been hosted in one of the many incubators located in the Sentier where he/she could have learned how to pitch investors in order to raise financing from funds that no longer exist or no longer would have invested in venture in France (Europ@web, Atlas Venture, 3i, Galileo partners…)!

The current boiling of the French start-up ecosystem promises great optimism within a country which is clearly lacking of it. As overwhelming as it may be, let’s not be too candid!

These are my 3 ‘key’ points of advice to young entrepreneurs I came to learn from the crazy 2000s years spent in Paris as an investor:

Networking events : enjoy first!

Be selective, keep your energy for your project not for the cocktail parties and don’t expect too much from these networking events, such as finding an investor!

I always wonder what is the real value in meeting a financial investor out of the blue in a cocktail, whilst not being prepared at all and sometimes in such surrounding conditions that you can hardly hear what they say! I have been in the Venture world for the past 15 years and I cannot remember a single investment that I sourced from these ‘speed dating’ parties!

These parties should be taken for what they are: to have fun. I recently went to one of them and indeed it was very nice but interestingly enough, the crowd was closer to the 20s and 30s age group rather than 40s to 50s …the latter group seems to favour breakfasts at 8:30AM more than late evening parties!

Incubators : look for real value!

Every single day, there is an incubator opening in Paris to complete an already long list including 50Partners, The Family, Numa, Microsoft Ventures, Paris Pionnières. They usually suggest training to entrepreneurs as to how to pitch investors. I would not rank these trainings as a top priority for young entrepreneurs.

Find your customers first, they are the best suited to validate your value proposition. Paying customers should be counted as a source of financing, not only the VC! Investors can accelerate the development and the growth alongside the customers. The circle is virtuous since existing clients are also a credible way to convince VCs to invest!

Luckily, today several incubators have understood that and put the emphasis on networking with potential customers, with former CEOs (Business Angels of the incubators) challenging your positioning or making introductions. This brings way more value. When selecting your incubator, think carefully as to how much value they can bring. As remuneration for their added value, incubators will ask for equity. Therefore, share your ‘treasury’ wisely!

Over-sized fundraisings and high valuations : be careful of the side effects!

Similar to the 3i, the Carlyle of the 2000s, we now see large growth funds managing 250M€ + funds extending their strategy in order to include investment in early-stage companies. Similarly, we see VCs fund structuring seed funds. In each case, the fund is moving away from its original sweet spot whilst keeping roughly the same size investments, therefore creating over-inflated rounds of financing. Since dilution remains roughly the same, valuations are consequently increasing.

Raising more money at a higher valuation benefits the entrepreneur. However, there is no such thing as a free lunch! In order to cope with this situation, investors are structuring complicated financial structure (liquid pref above 1x, minimum return guarantee, ratchet…). Starting with over-prized valuation, sets the expectations for the next step higher. Therefore, it is crucial to achieve the milestones previoulsy set, or else the next refinancing will be harder and the management team would be at risk of being badly diluted following the use of the ratchet.

The key to success is to create a beneficial and mutual interest between investors and entrepreneurs on the long-term, with a realistic development plan, an adequate round of financing which includes room for some mitakes, under straight forward financial terms. For this final topic, I am referring to valuation in particular. Both parties need to openly discuss the valuation instead of trying to avoid the topic substituting it with the use of abundant legal clauses…The only party that benefits from doing so, are lawyers.

Financing structures with convertible loans is a practice that is now emerging in France. I find them quite interesting for seed stage. Indeed the discussion of a cap is necessary (which is basically the maximum an investor is willing to offer), and you avoid negotiating +/- 500k€ of a company valuation. This proves to be totally irrelevant for such early stage companies.

So yes, let’s keep this positive spirit since it happens so rarely in France

but let’s not get burned !….

…. by the way same applies to your skin for those who intend to make a break !

Enjoy your Summer!

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