French Tech: tricolor startups put to the test by the crisis

Strong turmoil to come in French Tech. After the splendor of the last few years, marked by a spectacular increase in power, French start-ups are preparing to go through a more delicate period due to a difficult economic context, in a context of endless shortage of electronic components and inflation that gradually stifled the purchasing power of consumers.

Is the party over?

This is a big test for French technology after the Covid-19 pandemic. It is true that the health crisis has been a tremendous growth accelerator for many companies in the technological sphere, as evidenced by Gafam in the United States and by Doctolib in France. The situation is very different in 2022, a year that should have a much more negative impact on the sector.

Just look across the Atlantic to see the difference between the health crisis and the current one. Two years ago, Gafam and others like Zoom and Netflix never failed to reap colossal profits. As of now, the party is over and the grimace soup is very hard to digest.

In the wake of raising key rates decided by central banks to fight inflation, Wall Street is proving relentless on tech stocks. It is not Meta who will say otherwise. Mark Zuckerberg’s company saw its market capitalization drop by more than $400 billion in nearly six months due to disappointing performance. For the other members of Gafam, the picture is not much brighter, they are all experiencing a slowdown in their growth, which by definition cannot be eternal.

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Winter is coming was eight months ago. Now winter has arrived and nobody talks about it.

A founder of a French unicorn

In France, still very few startups, imitating Deezer, have tried their luck on the stock exchanges. However, if French Tech’s nuggets don’t suffer from stock market upheavals, they face a more anxious climate, with more cautious investors. Until a few months ago, mega-round ads with exceptional ratings continued to flood the media landscape. From now on, it’s absolutely calm, or almost.

crumbling nuggets

This is how some young shoots start to seriously worry about their evaluation. XXL’s fundraising gave way to austerity. “Currently, the trend is to halve the value. Everyone saves money, not all companies do it to the same degree.”, observes a businessman behind a French unicorn. “Winter is coming, that was eight months ago. Now winter has arrived and nobody talks about it. It feels like Google is at its peak, as if everything is fine. It is quite paradoxical”regrets.

Although tricolor startups are more discreet in their communication, industry personalities are already seeing the first effects of the crisis. This is particularly the case for Jean-David Chamboredon, executive chairman of the ISAI investment fund, who notes that the growing number of questions surrounding valuations has “as a consequence of the multiplication of internal operations as extensions of financing rounds”.

“Companies that need money need to find a solution, so they can find it with their current shareholders. But as a rule, these tower extensions are not very publicized. The investment and valuation of these companies are not disclosed. So we still don’t know how much it’s worthexplains the French investor. Inner towers are seen by the market as defensive. But no one will brag about being defensive. They are therefore not intended to be made public.

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When the market recovers, investors’ indicators will have changed.

Jean-David Chamboredon, Executive Chairman of the ISAI Investment Fund

While well-established startups can count on the support of their shareholders to get back into the pot, not all are so lucky and are faced with a difficult equation to solve. “At France Digitale, we are seeing a period of uncertainty that is slowing new business. Fundraising periods are longer. That’s because investors need more time to evaluate projects and determine multiples.”notes Sarah-Diane Eck, vice president of France Digitale and founder of Lum Network, a start-up specializing in blockchain. “There have been multiple histories in recent years. Startup valuations could reach 40 times annual recurring revenue just a few months ago. Now it is more around 10 times”She adds.

After several years of exuberance where money flowed freely into startup coffers, investment funds are calming the game, asking companies in their portfolio to retain their cash and better financial visibility for the coming months. Because if the French ecosystem remains in a record year of 2021 – 11.6 billion euros raised against 5.4 billion in 2020 and a solid first half with 8.4 billion euros (+ 63% compared to the same period of the year past) – the funding rate has since declined considerably. There was also no sensational announcement in this 2022-2023 school year.

It is not yet time for panic in France. In this difficult context, French technology may even be at the beginning of a new era. “When the market recovers, investors’ indicators will have changed. Nine months ago, the only criterion was growth. Tomorrow, without a doubt, it will be growth combined with the ability to generate margins, growth that contributes to future profitability”analyzes Jean-David Chamboredon, who believes that “some models like SaaS are likely to restart quickly”unlike B2C due to “less recurring revenue”. This view is shared by Sarah-Diane Eck: “Before, the growth rate was the judge of the peace indicator. Today, investors look at contribution margins, cash flow and Ebitda [bénéfice avant intérêts, impôts, dépréciation et amortissement, NDLR]. The indicators monitored by investment funds are changing.” In the eyes of the French entrepreneur, “Funding must learn from over-evaluation”.

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Towards an intense period of consolidation?

In addition to this emerging paradigm, the current period may favor a wind of consolidation in the ecosystem. With a few more feverish start-ups, most weakened by a devaluation, the mergers and acquisitions market is expected to be particularly intense in the coming months in France, and more broadly in Europe. But with the dollar much stronger than the euro currently, it’s the American heavyweights who can take advantage of the situation. “Viewed from the US, these are French Tech sales”assured in the beginning of September Franck Sebag, partner of EY, in the columns of the Figaro.

“In the United States, there are many potential buyers of technology companies. From the moment they are informed that a start-up has valuation multiples lower than them, they are interested in becoming active in terms of acquisitions. Also, American venture capital funds are very opportunistic, very pragmatic. They won’t bother restoring a company, turning it into making money in three or four years.explains Jean-David Chamboredon. In Europe it is different. We have very few buyers, very few European companies able to buy start-ups or scale-ups. So you have to trust the Americans to buy us.”

If the executive chairman of the ISAI investment fund admits that there will be “an appetite of American players and many cheap acquisitions”, seeing American groups chasing European nuggets is not inevitable. And for good reason, Old Continent ecosystems like French Tech have grown considerably in recent years. “We have many scale-ups that can become market consolidators and that are starting to buy smaller companies to accelerate their business. road map, with a wider range of products and possibly faster internationalization. If Europe can do M&A [Mergers & Acquisitions, NDLR] and consolidate markets cross the border, we will have European players who will be able to compete with American players.”, believes Jean-David Chamboredon. And to add: “When money is tight, investors rarely want to bet on the number 2 or 3; number 1 will therefore naturally find a consolidator situation. This can accelerate the strengthening of the market.”

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The tech industry is Darwinian.

Jean-David Chamboredon, Executive Chairman of the ISAI Investment Fund

Despite headwinds, French startups are confident. “French Tech has all the qualities to resist. It’s an ecosystem that has really taken shape in the last 10 years. Today he is mature”, says Sarah-Diane Eck. An opinion shared by Jean-David Chamboredon: “The ecosystem is much stronger, more structured and more connected to international venture capital, with leaders’ mindsets in terms of ambitions changing considerably. French technology will be much stronger in 2024 than in 2014.” It is true that this key figure in digital entrepreneurship, who started the Pombo movement in 2012, recognizes that there will be “probably bankruptcies, social plans and cheap acquisitions”but it is not concerned with the medium-term resilience of the ecosystem. “The tech industry is Darwinian. The current crisis will raise the specter of success or failure.”it sums up.

It is in this particular climate that French and European tech players will gather on September 28 at the Musée des arts forains in Paris for France Digitale Day. The opportunity to measure the temperature in this unique period. “I am convinced that there will be the same dynamism as before”, assures Sarah-Diane Eck. Meanwhile, the vice president of France Digitale launches an appeal: “It is essential that European institutional investors continue to support innovation.”. The coming months will bring the first elements of an answer.

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