When the French government approved the creation of tax-advantaged innovation funds known as “Fonds Communs de Placement dans l’innovation” (FCPI) in 1997, it set the stage for the transformation of the country’s venture capital market.
Whereas in the late 1990s, a handful of VCs such as Sofinnova and Partech dominated early-stage investing, today large FCPI management companies are among the most active players. That includes AGF Private Equity, OTC Asset Management, Credit Agricole Private Equity (CAPE), Seventure, a subsidiary of French investment bank Natixis, Innoven Partenaires and Xange Capital, part of La Poste Groupe. Xange alone manages nine innovation funds totalling over €140 million.
“One can hardly imagine the French venture capital market now without the FCPIs,” says Wolfgang Krause, managing partner with Seventure. “The government’s support efforts are totally focused on these funds.”
Rather than invest government money directly in early-stage companies, the French model focuses on retail investors. Individuals who invest in an FCPI, many of which are offered by private equity arms of banks or insurance companies, get a tax break on 25 per cent of their investment up to €12,000 per person or €24,000 for a household. They also get a capital gain exemption if they hold the shares for five years. And since January 2008, the funds have allowed investors to get a 40 per cent reduction on the wealth tax from shares they invest in an FCPI.
With many of these funds showing long-term returns in the red, one can argue over their success. But on the funding side, there is no denying the mini-boom the FCPIs have caused in the French venture capital market. Between 1997 and 2007, €4.4 billion was raised and over 2,500 investments made by FCPI funds, according to OSEO, the government innovation agency which provides financial support and assistance to French SMEs.
According to one early-stage advisor, Chausson Investment, last year €1.3 billion was invested in French early-stage companies, up from €960 million the previous year.
But these funds cannot find enough good homes for their money in France, and over the past 18 months French investors Seventure, Xange and CAPE have opened up German offices to invest in early-stage companies.
“There aren’t as many opportunities in France to invest as the money that has been raised,” says Christian Claussen, who earlier this year left the Germany venture capital firm TVM to help CAPE develop its business. The French funds are relying on experts such as Claussen to open the door to the German market for them. CAPE has €375 million under management, mainly in the form of FCPI funds, and plans to invest up to €10 million over the next year in Germany.
Certainly, there is room for more investment. The German VC market lags France in terms of investment as a percentage of GDP at 0.04 per cent, compared to France’s 0.06 per cent, according to 2008 figures from the European Venture Capital Association. Overall, annual VC investment in Germany is about half of that in France. In 2008, for example, only €439 million was invested in venture capital in Germany, according to the German Venture Capital Association.
Krause says competition for deals in Germany isn’t nearly as high as in France and prices are generally lower. A former employee of the now-defunct Deutsche Venture Capital, Krause is on the lookout for classic ICT investments. Since making its foray into Germany, Seventure has invested in a software company, Conject, based in Munich and in Cologne-based Retailo, which is setting up specialty greeting card shops in supermarkets.
There is a particular gap in the German market for VCs that are prepared to invest at the growth and expansion stage. While the German government’s High Tech Gründerfond and KFW support companies at the seed stage, after that there is only a small pool of potential VCs, such as Wellington Partners, Target Partners and Early Bird Venture Capital, to turn to.
“The likelihood of finding a series A, B, or C round for a company that needs to grow is very small. If Wellington doesn’t like your business plan, you have a problem,” notes Krause.
Within France, there has been some criticism that FCPIs have not performed well and that banks, insurers and postal agencies don’t make good VCs. But Krause thinks the approach of the French government is better than in Germany. “Here, the companies hang more directly on the leash of the state, which can have political implications. In France, the government allows private individuals to decide themselves to invest, and if the VCs do a bad job, they will surely not last long.”