In the first half of 2022, French startups raised €8.4 billion (EY barometer published July 17). This is significantly better than the first six months of 2021 (+63%). Despite the increasingly unfavorable context (lack of liquidity, need to concentrate on certain market segments and more demanding venture capital funds in terms of profitability, etc.), the total amount raised last year (11.57 billion euros) is expected to be exceeded this year. The strong increase in the first half, however, hides major disparities: funds are more selective (business plans are scrutinized more closely, for example) and liquidity has mainly focused on a few large transactions (Qonto in financial services, EcoVadis in corporate social responsibility performance evaluation or Exotec in robotics).
Profitability requirement and M&A wave
Start-ups still don’t encounter real difficulties in raising money. However, investors are demanding responsibility. It’s a novelty. Many fine French fintech nuggets are under pressure. It’s an open secret. They recruited with a vengeance. Now investors want a quick return on investment. We are witnessing a boom-bust phenomenon that is quite typical of the start-up world. For years, many of them burned money without worrying about profitability. The scarcity of liquidity (which results both from the current economic deterioration and the monetary tightening of central banks that increases the cost of money) forces them to reconnect with financial notions that they considered obsolete. It is often said that investors buy the future and not the past or the present to justify both the absence of profitability requirements and the sometimes stratospheric levels of appreciation. The least we can say is that the present is now being harshly remembered by all actors in the ecosystem (in the form of the crisis that is hitting our economy).
We have not yet entered the contraction phase – which will be marked by mass layoffs, postponement of hiring and a drop in investments. This could start from September and get worse early next year, depending on the duration of the crisis. For the best-backed start-ups (whether because they focused on profitability early enough or because they raised enough money without wasting it to weather the storm), the opening period is a godsend. The drop in valuations (how many unicorns will there be in France after this step?) will cause a big wave of mergers and acquisitions (M&A). The process has already begun (Qonto took over its German competitor Penta). This has two major advantages: consolidating the market to reach a critical size (ie, creating value) and restructuring internally, not officially because of the crisis, but because of the acquisition (we reduced the famous duplicates).
Bad news is good news
The next few months will be difficult for the start-up nation. But this bad news is actually good news. We explain to you. For a long time, start-ups thought that profitability was just a matter of the old economy (SMEs, FTEs, etc.). It was obviously wrong. A bubble economy is not healthy (in some ways the start-up nation is that too. Bubbles have been accentuated with the Covid crisis ever since banks were forced – the term is chosen voluntarily – to hand over PGEs to startups who don’t need them or would never be able to repay). When the purification process is complete, we will return to good old economic fundamentals. The theme of profitability will prevail. There are several solutions to be profitable in the current economic and financial context: mergers and acquisitions when possible (but the integration of the acquired entity is often complex and usually takes several years), cost rationalization (for example, creation of performance indicators to measure productivity), slashing less profitable product lines (this is what several large companies have been doing in recent months in the face of rising input costs) or investing in new technologies to reduce costs and increase long-term operational efficiency.
Artificial intelligence to rescue startups
This is where artificial intelligence (AI) comes in. About 80% to 85% of start-ups use more or less sophisticated data management software (e.g. in KYC procedures for Know your customer, or in the context of the fight against money laundering to compare the data provided. This is called RegTech, for Regulatory Technology). But only 5% actually use machine learning (machine learning, in English). It’s very (very) little. There is a whole world of possibilities that is not explored at this stage. Data management software today does not allow you to precisely target the leads (acquisition channel) or to retain customers by offering them the most appropriate financial products (improving the customer experience).
Fortunately, several companies in the field of AI have made impressive progress in the field. IBM’s Watson platform can analyze a start-up’s social media and its competitors to create one or more standard target customer profiles (in many cases, start-ups are unable to accurately know their typical customer with the data they have ). This can help identify influencers who can be partners in a targeted marketing campaign. It is a concrete application, for example. TradeDesk (listed on Nasdaq) and Substrate AI (listed in Madrid) have developed a similar approach. TradeDesk analyzes more than 11 million advertising investment opportunities to determine which approach will be most effective in reaching a specific audience (which implies, beforehand, precisely defining what the audience is). Substrate AI has developed AI technology that allows it to identify which European companies are most likely to use currency hedging services (from a panel of nearly 23 million companies).
In the short term, investing in technology, and in particular AI, involves a cost. Intuitively, we tend to postpone this investment in times of crisis. While you are doing this, your competitors will definitely take a different approach, which will end up gaining market share. When you put off investments (even in times of headwinds), it can lead to mortgage the future of your business. We know that recovery is always difficult. We must understand the current crisis as an opportunity to make the right technological choices (study the feasibility of an AI-based approach), rationalize our costs and also reconnect with the essence of capitalism – profitability (this is not a big word, it is necessary create value, share it and redistribute it!). This will make it possible to start over in a healthier way, especially in the French startup ecosystem.