Microsoft enrols French business angels

Idées selects 25 newly formed software companies each year to mentor and introduce to Microsoft customers, with the broad ambition of enlarging Windows ecosystem.  Since its launch in October 2005, Idees has conducted two beauty contests, with 220 candidates the first year and 350 for its 2006-2007 campaign.

Now that Microsoft France is about to start its third selection process, it is adding something crucial for start-up companies: money. But not from the company’s coffers.

At present the support provided by the Idées programme is mainly geared towards technology and marketing. For example, Microsoft has opened doors to its large customer base, giving its imprimatur to its selected small companies. Companies also have benefitted from access to the Microsoft Technology Center in Paris, where they can test and improve their products.

But on the financing front, Microsoft’s assistance was limited to facilitating contacts with venture capitalists.

Like many of their peers in Europe, French professional VC’s are reluctant to invest tiny amounts of money in small early rounds. Doing so requires the same amount of due diligence and mentoring as making larger investments. This role has been falling more and more onto the shoulders of government-backed funds and business angels.

It was this that led Microsoft to sign the agreement with France Angels, which was created in 2001 to develop this form of funding, and is a federation of about 50 local networks, most of them rooted into existing technology clusters, such as aeronautics in Toulouse or nanotech in Grenoble. In total there are more than 3,000 affiliated angels.

“We recently decided to include more sectors and build a national network to increase opportunities for our members,”| says Nicolas Fritz, France Angels’ president. “Software innovation is buoyant in France, so we decided to start there, and to combine Microsoft’s leverage with the seed money solution we can provide.”

Competition from real estate

Microsoft’s endorsement of France Angels is critical for the development of this form of investment in a country where most wealthy people still prefer the safe haven of real estate to the risk associated with high tech entrepreneurship. After a peak in 2000 the number of business angels fell sharply when the Internet bubble burst.

But not all the excitement generated by the dotcom boom has vanished. After a drop in 2001, the number of business angels in France has been growing apace and the numbers doubled between 2002 and 2007.

Despite this increase, business angel investments still represent a modest share of venture financing in France. According to AFIC, the French private equity association, seed and company creation investments reached €536 million in 2006. France Angels says its 36 networks of business angels invested €26 million in start-up companies in 2005.

Angel investments are by their very nature small. “Typical investment of France Angels members are €140,000 per start-up,” says Fritz. “Each member invests individually about €50,000 per year.” Therefore, their influence is more visible, not oin the overall amount invested, but in the number of companies they have financed at seed level: 150 out of a total of 335 in 2006.

More angels, please

This is likely to grow. The French government wants to increase fivefold the number of business angels, to reach 20,000 by 2012. That will be still half the estimated number today in the UK. But recent reforms suggest it is possible. Since the beginning of this year, French business angels have a new legal status that not only protects their personal asset from potential bankruptcy, but allows them to co-invest through limited partnerships and gives them a 25 percent annual income tax break, plus no tax on capital gains if the investment is kept more than eight years.

Last summer, newly elected president Sarkozy also introduced an annual tax break on the high rate ‘fortune’ tax for the first Euros 50,000 invested into a SME. Because a large number of business angels are liable for the fortune tax, the chances are they not only will use the tax breaks for themselves but also encourage more conservative investors to do the same.

The success of those measures remains to be seen. But it has certainly bolstered ambitions at France Angels. The association is now working on setting up links similar to the one in software with Microsoft, in media, life sciences and cleantech.

And Fritz is also quick to point that France Angels’ agreement with Microsoft does not mean exclusivity or a loss of independence. “France Angels software initiative is open to other companies, like IBM, and we will continue to invest in start-ups that are not selected by Idees.”

It may prove harder to apply this idea to other sectors. IT companies have a culture that considers ecosystems are crucial for their own growth. But it may prove more difficult to duplicate this type of association in biotech or cleantech, where corporations prefer to buy established businesses from private equity, or licences from academe.