Strong turmoil lies ahead in French technology. After the splendor of recent years, marked by a spectacular rise in power, French start-ups are preparing to go through a more delicate period due to a difficult economic context, in a scenario of endless shortages of electronic components and inflation that is gradually suffocating the purchasing power of consumers.
Is the party over?
This is a big test for French Tech in the wake of the Covid-19 pandemic. Admittedly, the health crisis has been a tremendous growth accelerator for many companies in the tech sphere, as evidenced by Gafam in the US and 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 continued to reap colossal profits. As of now, the party is over and the grimace soup is hard to digest.
In the wake of the hike in key rates decided by central banks to fight inflation, Wall Street is relentless on tech stocks. It is not Meta who will say otherwise. Mark Zuckerberg’s company has seen 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 better, they are all experiencing a slowdown in their growth, which by definition cannot be eternal.
Winter is coming it’s been eight months. Now winter has come and no one talks about it.
In France, very few startups, imitating Deezer, have tried their luck on the stock exchanges. However, if French Tech’s nuggets do not suffer from the upheavals on the stock exchange, they face a more restless climate, with more cautious investors. Until a few months ago, mega-round ads with exceptional ratings flooded the media landscape. From now on, it’s calm, or almost.
This is how some young shoots are starting to seriously worry about their assessment. XXL fundraising gave way to austerity. “Currently, the trend is to halve the valuation. 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 come and no one talks about it. It feels like Google at its peak, like everything is fine. It’s quite paradoxical”he regrets.
Although the tricolor startups are more discreet in their communication, sector personalities are already noticing the first effects of the crisis. This is particularly the case for Jean-David Chamboredon, executive chairman of investment fund ISAI, who notes that the growing number of questions about valuations has “as a consequence of the multiplication of internal operations, such as extensions of financing rounds”🇧🇷
“Companies that need cash need to find a solution, so they find it with their existing shareholders. But, as a rule, these tower extensions are not advertised very much. The investment and valuation of these companies are not disclosed. So we still don’t know how much it’s worthexplains the French investor. The inner towers are seen by the market as something defensive. But no one is going to brag about being on the defensive. They are therefore not intended to be made public.
By the time the market recovers, investor metrics will have changed.
If well-established start-ups can count on the support of their shareholders to get back into the pot, not all are as lucky and face a difficult equation to solve. “At France Digitale, we are witnessing a period of uncertainty that is slowing down new business. Fundraising periods are longer. This is 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 startup 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’s more like 10 times”she adds.
After several years of exuberance where money flowed freely into the coffers of start-ups, investment funds are calming the game, asking the companies present in their portfolio to guarantee their cash and better financial visibility for the coming months. Because if the French ecosystem remains in a record year in 2021 – 11.6 billion euros collected against 5.4 billion in 2020, and a solid first half with 8.4 billion euros (+ 63% compared to the same period of last year) – the funding rate has since decreased considerably. There have also been no sensational announcements this 2022-2023 school year.
It is not yet time for panic in France. In this difficult context, French Tech may even be at the beginning of a new era. “By the time the market recovers, investor metrics will have changed. Nine months ago, the only criterion was growth. Tomorrow will undoubtedly 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 because “less recurring revenue”🇧🇷 This view is shared by Sarah-Diane Eck: “Before, the growth rate was the judge of the indicator of peace. Today, investors look at contribution margin, 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 businessman, “fundraising must learn from overvaluation”🇧🇷
Towards an intense period of consolidation?
In addition to this nascent paradigm, the current period may favor an ecosystem consolidation wind. With some feverish start-ups, most weakened by a downgraded valuation, the M&A market is likely to be particularly intense over the coming months in France, and more broadly in Europe. But with the dollar much stronger than the euro these days, it’s the American heavyweights who can take advantage of the situation. “Seen from the United States, these are sales at French Tech”assured in early September Franck Sebag, partner at EY, in the columns of the Figaro🇧🇷
“In the United States, there are many potential buyers of technology companies. Once they are told that a start-up has valuation multiples lower than them, they have an interest in becoming active in terms of acquisitions. Also, American venture capital funds are very opportunistic, very pragmatic. They won’t bother restoring a company to cash in three or four years.explains Jean-David Chamboredon. In Europe it is different. We have very few buyers, very few European companies capable of buying start-ups or scale-ups. So you have to trust the Americans to buy us.”
If the executive president of the ISAI investment fund admits that there will be “an appetite from American players and lots of 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 start to buy smaller companies to go faster in their road map, with a broader product offering and possibly faster internationalization. If Europe manages to do M&A [Mergers & Acquisitions, NDLR] and consolidate markets cross 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; the number 1 will therefore naturally find itself in a consolidator situation. This can accelerate the strengthening of the market.”
The tech industry is Darwinian.
Despite the headwinds, French startups are confident. “French Tech has all the qualities to resist. It’s an ecosystem that has really taken shape over the last 10 years. Today he is maturesays 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 having changed considerably. French technology will be much stronger in 2024 than it was in 2014.” It is true that this key figure in digital entrepreneurship, who started the Pigeon movement in 2012, recognizes that there will be “probably bankruptcies, social plans and cheap acquisitions”but is not concerned about the resilience of the ecosystem in the medium term. “The tech industry is Darwinian. The current crisis will raise the spectrum of success or failure.”resume.
It is in this particular climate that French and European tech players will meet on September 28 at the Musée des arts forains, in Paris, for France Digitale Day. The opportunity to take the temperature in this unique period. “I am convinced that there will be the same dynamism as before”, guarantees 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.