How the Fall of Finance Led to French Tech's Rise
How the Fall of Finance Led to French Tech's Rise
France is emerging as a major European tech hub: La French Tech, as it is known, is improbably beating out Germany and rivaling London for funding levels and company valuations. A significant portion of France’s most talented young people now want to work in an innovation ecosystem rather than in secure jobs in government or traditional industries. The reason for the shift is not Emmanuel Macron, the reformer who has become French president. It long predates his rise.
Instead, it has its roots in the 2008 financial crisis. In most countries, the dot-com bubble, for all the waste, at least left behind infrastructure and a generation of battle-hardened entrepreneurs; in France, however, the adoption of the internet was delayed by the French government’s home-grown substitute, the Minitel. The belief that the internet was a fad remained after the dot-com bubble burst, hurting investment and entrepreneurship.
Between London, with the built-in advantage of the English language for going international, and Berlin, with its reputation as a hipster mecca, France was on no one’s radar. But the collapse of Lehman Brothers and its repercussions showed young French graduates that betting on entrepreneurship and innovation was not just exciting or potentially rewarding, but actually less risky than more conventional paths. I witnessed this first-hand as a student at a top French business school at the time, watching classmate after classmate spurn solid offers from top firms to go start a company, even in the midst of a historic downturn.
It’s hard to underestimate the impact of such a cultural shift. Those who study Silicon Valley’s success return to culture as the X factor; after all, so many other places have talent and capital but have failed to replicate its genius for innovation. Silicon Valley’s unique blend of relentless pragmatism in trying new things, healthy disrespect for conventional thinking, and eagerness to work very long hours contrasts with the cliché of the French conception of work, which prides security, hierarchy and work-life balance. But the new French entrepreneurs are of a different breed.
Entrepreneurial ecosystems mature over a long period of time. Silicon Valley became a global innovation powerhouse over many years, as startups followed Hewlett Packard in the 1970s and talent attracted more talent. France now seems to have momentum. According to market research firm CB Insights, 700 new venture deals happened in France in 2017 compared with 251 in just 2015. France has its own unicorns such as Criteo, an ad-tech firm that gives Google and others a run for their money, and car-share service BlaBlaCar, which is expanding internationally after becoming a phenomenon in France.
There are now ventures that seek to spark other big successes. Xavier Niel, France’s most notorious tech billionaire, is behind transformative initiatives, such as Kima Ventures, a seed fund that shook up the space by investing small amounts of money in startups at a very high clip. There is also 42, an innovative engineering school that, unlike the traditional French grandes ecoles, focuses exclusively on computer engineering and draws on students from unconventional backgrounds; and Station F, a lavish startup campus which claims to be the biggest incubator in the world.
France is a more hospitable place for entrepreneurs these days. Its reputation for red tape and onerous taxes is now less and less deserved; the past decade has seen real reforms. These have been slow, gradual and unnoticed, but their cumulative effect is important. Ten years ago, getting in touch with someone about taxes involved collating countless paper forms and standing in line for hours at the tax office; today, anybody can log onto their account with the finance ministry, send an email and get an answer within the day. Incorporating a business is much less tedious than it used to be. A myriad of these sorts of small changes can add up to a more significant shift than big-ticket reforms.
The French government hasn't stopped meddling, though, and its moves to encourage investment into innovative companies have been a mixed blessing, with frustratingly complex schemes and frequent changes putting a damper on certainty. But there have been noteworthy successes, such as tax-advantaged venture capital funds that provided a cushion when other sources of capital withdrew to safety in the wake of the crisis. BPI France, a public venture fund, contrary to all likelihood, became a very useful actor in the ecosystem. Far from engaging in industrial policy, BPI France is instead mostly a follow-on investor, boosting the impact of private capital rather than deterring it by picking winners and losers -- a recipe similar to the public venture funds that were key to Israel’s “start-up miracle” in its own build-out phase.
Despite his conventional background as an elite-educated bureaucrat-turned-investment banker, Macron likes to associate himself with this new, dynamic French business culture. The techies and entrepreneurs, in turn, are happy for his attention. His reforms, cutting and simplifying onerous corporate taxes, and making the labor market more flexible, should be good for la French Tech -- but only if they go far enough.
Before the financial crisis, France already had the two main underlying assets of a major tech center: quality infrastructure and top-level universities. It now has a better regulatory environment and has awoken the animal spirits of entrepreneurship. But the ecosystem is still fragile: Most of the new investment comes from corporates and foreign investors, who will retreat if there is a global downturn of if France proves unable to reform. If the money dries up too soon, la French Tech might still be seen as just a fad. But if it doesn’t, a lot of clichés about France might need updating.