The French endured strong unrest. After the splendor of the past few years, characterized by a spectacular rise in power, French start-ups are preparing to go through a more fragile period due to a difficult economic context, an endless shortage of electronic components and a background of inflation that is gradually suffocating the purchasing power of consumers.
Is the party over?
This is a major test for French technology after the Covid-19 pandemic. Admittedly, the health crisis has been a huge growth accelerator for many companies in the technology sector, as evidenced by Gaffam in the US and DoctLib in France. The situation is very different in 2022, a year that will have a much more negative impact on the sector.
It is enough to observe the other side of the Atlantic to appreciate the difference between the health crisis and the present one. Two years ago, Gapham and others, such as Zoom and Netflix, did not stop making huge profits. From now on, the party is over and Grimes soup is too hard to digest.
In the wake of key rate hikes set by central banks to fight inflation, Wall Street is looking bullish on tech stocks. Who will say otherwise is not meta. Mark Zuckerberg’s firm lost more than $400 billion in market capitalization in about six months due to disappointing performance. For other members of Gaffam, the picture is not so bright, all of whom are experiencing a slowdown in their growth, which by definition cannot be eternal.
Winter is coming eight months ago. Now winter has come and no one talks.
In France, still very few start-ups, following the example of Deezer, have tried their luck on the stock market. However, if the French tech nuggets are not the victims of the stock exchange ups and downs, they face a more anxiety-provoking climate with more cautious investors. Until a few months ago, announcements of mega-rounds with exceptional valuations flooded the media landscape. From now on, it’s dead quiet, or nearly so.
Thus some young shoots are beginning to be seriously concerned about their assessment. XXL Fundraising has given way to austerity. “Currently, the trend is to halve the assessment. Everyone saves money, not all companies go at it with the same intensity.”, notes an entrepreneur behind a French unicorn “Winter is coming, That was eight months ago. Now winter has come and no one talks. It seems that in these days it is Google, everything is fine. It’s quite paradoxical.”she laments.
Although tricolor start-ups are more discreet in their communications, sector figures are already seeing the first effects of the crisis. This is especially the case for Jean-David Chamboredon, executive chairman of the ISAI investment fund, who commented that the number of questions surrounding the valuation is increasing. “As a result of multiplying internal operations such as financing round extension”.
“Companies that need money have to find a solution, so they find it with their existing shareholders. But as a rule, this tower extension is not much advertised. Investments and valuations of these companies are not made public. Therefore, we still do not know how much it is worthFrench investors explained. Internal towers are seen as something defensive by the market. But no one will brag about being defensive. So it is not intended to make them public
Investors’ indicators will change when the market recovers.
If well-established start-ups can rely on the support of their shareholders to return to the pot, not everyone is so lucky and faces a difficult equation to solve. “At France Digital, we are observing a period of uncertainty that is reducing new contracts. Funding periods are longer. This is because investors need more time to value projects and determine multiples”Sarah-Diane Eck, vice-president of France Digital and founder of Loom Network, a start-up specializing in blockchain, notes. “Recent years have seen historic multiples. Start-up valuations can be 40 times annual recurring revenue just a few months ago. Now it’s about 10 times more.”she adds.
After several years of euphoria where money flowed freely into the coffers of start-ups, investment funds are calming down the game, asking companies in their portfolios to lock in their cash and better financial visibility for the next month. Because if the French ecosystem remains on record in 2021 – raising 11.6 billion euros against 5.4 billion euros in 2020 and a solid first half with 8.4 billion euros (+63% compared to the same period last year) – the funding rate has slowed down a lot since then. . There were no sensational announcements this 2022-2023 school year either.
France’s time of panic had not yet come. In this difficult context, French technology may even usher in a new era. “When the market recovers, investors’ indicators will change. Nine months ago, the only criterion was growth. Tomorrow, it will undoubtedly be growth coupled with the ability to generate margins, growth that contributes to future profitability.”Analyzed by Jean-David Chamboredon, who believes “Some models like SAS will probably restart fairly quickly.”Because B2C is different “Less Recurring Revenue”. This view is shared by Sarah-Diane One: “Earlier, growth rate was the judge of peace index. Today, investors look at contribution margin, cash flow and Ebitda [bénéfice avant intérêts, impôts, dépréciation et amortissement, NDLR]. Indexes monitored by investment funds are changing.” In the eyes of the French entrepreneur, “Funds to be raised from additional assessment”.
Towards intense periods of consolidation?
Beyond this new paradigm, current times may favor the winds of consolidation in the ecosystem. With some more feverish start-ups, most of them weakened by low valuations, the mergers and acquisitions market in France and Europe more broadly should be particularly intense in the coming months. But with the dollar currently much stronger than the euro, American heavyweights can take advantage of the situation. “Seen from the US, these are French tech sales”Frank Sebag, partner at EY, assured in a column in early September figaro.
“In the US, technology companies have a lot of potential buyers. From the moment they are told that a start-up has a lower valuation multiple than theirs, they have an interest in being active in acquisitions. Moreover, American venture capital funds are very opportunistic, very pragmatic. They won’t bother to turn a company around to recover, make money in three or four years.Jean-David Chamboredon explains. 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 rely on the Americans to buy us.”
If the executive chairman of ISAI admits that there will be an investment fund, Dr “Hunger for American players and much cheaper takeovers”, it’s not inevitable that American teams will run into European nuggets. And for good reason, old continent ecosystems like French tech have grown considerably in recent years. “We have a lot of scale-ups that can become market consolidators, and that start buying smaller companies to move faster. roadmap, With a wider product offering and possibly faster internationalization. If Europe can do M&A [Mergers & Acquisitions, NDLR] And to consolidate the market in a way cross the border, We will have European players who may be able to compete with American players.”, believes Jean-David Chamboredon. And to add: “When money is tight, investors rarely want to bet on numbers 2 or 3; Number 1 will therefore naturally find itself in a situation of consolidation. This can accelerate market consolidation.”
The tech industry is Darwinian.
Despite the headwinds, French start-ups are confident “French technology has all the qualities to resist. It’s an ecosystem that has really taken shape in the last 10 years. Today he turned, Sarah-Diane Eck said. An opinion shared by Jean-David Chamboredon: “The ecosystem is much stronger, more structured and more connected to international venture capital, the mentality of leaders has changed considerably in terms of ambition. French tech will be much stronger in 2024 than in 2014.” Admittedly, this key figure in digital entrepreneurship, who launched the Pigeon movement in 2012, admits that there will be “Probably Bankruptcy, Social Planning and Cheap Takeovers”But he is not worried about the ecosystem’s resilience in the medium term. “The tech industry is Darwinian. The current crisis will heighten the fear of success or failure.”He summed up.
In this particular climate, French and European technology players will meet at the Musée des Arts Foreignes in Paris for France Digital Day on September 28. Opportunity to take temperature at this unique time. “I’m sure the dynamics will remain the same.”, assures Sarah-Diane. Meanwhile, the vice-president of France Digital has launched an appeal: “It is essential that European institutional investors continue to support innovation.”. The next few months will bring the first elements of the answer.