Last summer I wrote a piece about how France’s Retail VC funds were facing bleak prospects (Retail VCs: Pivot or Perish). With the jury now in from 2012’s fundraising cycle for these vehicles, it unfortunately appears that my August piece proved ominously prescient.
By way of refresher, Retail VCs are the venture capital firms whose principal sources of funds come from tax-incentivized “retail” investors (i.e. French taxpayers). Such retail fund vehicles are a uniquely French concoction. Unlike conventional VC firms in Silicon Valley, for example, whose funding sources are institutional limited partners (“LP”s) like pension funds, insurance companies, endowments, and other corporations, retail funds come solely from a broad base of “unsophisticated” French taxpayers who receive a generous tax credit in return for supporting small companies.
France has two main types of retail funding vehicles: FCPIs (fonds commun de placement dans l’innovation) and FIPs (fonds d’investissement de proximité). Both vehicles offer the taxpayer an immediate 18% income tax credit and are free of capital gains taxes (a deduction off of wealth tax can also be an option). The creation of the FIP was intended to economically rejuvenate France’s regions, and accordingly, the vehicle is required to invest in young companies of a specific region, though not necessarily high-tech companies. FCPIs, in contrast, do not have the same geographical constraint but rather are required to invest in young companies defined to be “innovative” by the French government. FCPIs thus tend to invest more in high-tech startups, and over the last decade have represented the primary source of French VC funding alongside institutionally-backed conventional VC funds called FCPRs (fonds commun de placement à risque).
After a sharp fall in tax money raised in the prior year, the amount of funds raised be FCPIs in 2012 declined by “only” 28%, down to 184M€ in total. This substantial decline was no doubt propelled by the new French government’s tax measures which I warned about in an open letter to the President last September (cannot take all the credit as I certainly wasn’t the only one ringing the alarm). For the optimists that see reason to celebrate that the 2012 decline was not as precipitous as in 2011, I regret to break it to you that this probably does not signal a bottoming-out of the asset class but rather is likely due to the elimination of a different tax loophole called Scellier (a real estate vehicle) which used to compete for the same tax euros.
So what does all this mean for French startups?
The short answer is: it’s bad news for those hoping to raise VC funding in the near future. In the short term, it is likely that all retail VC funds (which still represent the lion’s share of the French VC market) are taking either of two positions: i) conserving their remaining funds for their existing portfolios, or ii) preparing to wind down their operations. If your startup is aready backed by a retail VC, it behooves you to find out which of these categories your VC is in. Perhaps France’s dropping to third place behind the UK and Germany in startup funding represents the canary in the coalmine of this gloomy trend.
There is, however, a silver lining to the storm clouds. First, some high-caliber French VCs are raising or have recently succeeded in raising conventional (FCPR) funds. Secondly, some VCs outside of France have demonstrated an appetite to invest in French startups of late. And as a last resort, one can always hold out hope that some alternative government initiatives will become viable substitutes over time to resuscitate the asset class.