Venture Capital is an activity consisting of financing equity or quasi-equity financing of newly created companies. This activity is generally different from private equity, which involves buying out more mature industrial companies. Capital is often provided by wealthy investors or investment banks, even if venture capital does not always go through financial assistance (technological, managerial support, etc.). The risk is therefore greater in this segment, which may explain why this sector is more developed in the United States than in Europe, where risk aversion is greater, but this is necessary to find the rare pearl whose success will be immense.
Unlike the private equity sector, where a long-term vision predominates, venture capital investors (VC) expect funds to exit after 4 or 5 years. Another notable difference is that VC funds generally do not take control of the target company but are content with a smaller, minority stake, while of course bringing their expertise to the start-up.
Let’s start with a round-up of venture capital in France: in 2017, start-ups raised 2.7 billion euros, and more than 3 billion in 2018. This makes France the main player in the VC in Europe, ahead of Great Britain (2.3 billion) and Germany (1.1 billion). The amount invested in the sector is growing rapidly, by about 500 million per year over the last few years. These figures are much less impressive than on the private equity side, but this makes sense since the companies involved are smaller.
How does a Venture Capital transaction go?
A start-up with innovative ideas necessarily needs financial resources to begin its development process. It must therefore raise capital from different entities and through financing stages that we will dissect. Here they are:
The “seed” phase, the image of the tree being quite adapted: during this phase, the tickets are rather low, usually between 100,000 and 700,000 euros. The aim is to give the start-up the opportunity to realize its business plan, build its team, cover its expenses… potentially attract VC funds in the next stages of funding. The capital bringers during this stage can be relatives, friends, but especially business angels always looking for the rare pearl.
In France, Xavier Niel’s Kima Ventures fund is the most active seed fund in the world and invests tickets of around 150,000 euros in 100 start-ups each year (Zenly, PayFit, Ledger, TransferWise, etc.).
The “A-Series”: during this phase, the company must have an established business plan and is thinking about developing the scope of its business (which must be “scalable”), it affects more and more customers and may even think about internationalizing. A long-term vision begins to emerge, and future profits become identifiable. The aim is therefore to realize, monetize the ideas of the company that is to say to make the project a real source of revenue.
For this, more funding is required, usually between $800,000 and $3 million, although these limits are constantly increasing due to the rapid growth of the sector and the rapid growth of the number of unicorns, these tech start-ups mainly valued at more than a billion dollars and which upset the amounts involved
More broadly, apart from these unique cases, the valuation of companies at this stage regularly reaches $10 million or $15 million. At this stage of the adventure, VC funds are starting to come into play, such as Benchmark or Sequoia, which are world-renowned.
The “B-series”: at this stage, the company must be well established in its market, and generally wants to project itself internationally but needs significant financing for this. Similarly, absorption of a few competitors can be envisaged, and again a certain amount of capital is required. We must now build a strong and stable team and ensure sustainable growth.
The stakes of this stage are crucial and to master them, tickets become more and more generous, usually between 3 and 7 million dollars, but these thresholds can sometimes explode. Specialized VC funds on this “mid game” or “late game” are starting to come into play to make a contribution to the building. As companies in this segment are relatively strong, their value is increasing and it is not uncommon for it to reach between 30 and 60 million.
The “C-Series”: companies that are reaching this stage are already experiencing some success. Their goal is to raise more funds to launch new products, conquer new markets (especially abroad). Growth dynamics need to be accelerated as much as possible in order to achieve a high return on investment and on a short-term horizon. Risks are starting to become less, so larger entities are involved in financing, such as private equity funds…
The value of the companies during this phase easily reaches $100 million, possibly much more.
In most cases, The C Series marks the end of the process before a sale of the company or before an IPO. But some companies go much further: Softbank’s Vision Fund, in partnership with Saudi Arabia, raised $93 billion in 2017 and manages more than $100 billion today. The goal is to invest billions in innovative startups, especially in the United States: executives have announced to President Trump that they will inject more than $50 billion into “established companies that require substantial financing of growth” and that this would create 50,000 jobs.
For the largest startups, whose valuations exceed ten billion dollars, the IPO is not as systematic as before: if Amazon or Google have become public with a valuation (here confused with market capitalization) of less than a billion dollars, Uber will be valued more than 70 billion dollars at its IPO (Initial Offering Public). To do this, the company used E, F, G… It should be noted that its G-Series saw the Saudi sovereign wealth fund’s entry into the capital in 2016, to the tune of $3.5 billion.
What are the most attractive areas in France?Unsurprisingly, the software and IT services sector dominates, with 756 million in 2017, such as the iAdivize (online marketing platform, to foster and facilitate business-customer interaction) that raised $32 million. More recently (April 2019), the French fund Partech Ventures has invested 17.7 million euros in the British care booking platform Schedule and takes the lead, ahead of American and German funds in particular.
Next comes the e-commerce sector with about 700 million raised, despite an 18% drop in deals.
On the outstay side, there are strong capital gains, including the sale of Zenly (online services sector) for $300 million to Snapchat after raising $30 million the previous year.
However, new segments are emerging and are beginning to take on a certain magnitude, for example that of biotech’s (generally very advanced medical technologies). We can quantify this good growth: 1400 start-ups per year between 2015 and 2017.
Venture Capital: a sector that attracts!
An argument often comes up: it is still more comfortable to be in the shoes of the investor than in that of the entrepreneur. One can diversify its investments and eventually suffer a setback; the other, if it fails, loses everything. As Bartosz Jabukowski (EQT Ventures) argues, venture capital is “a way to be part of the start-up ecosystem without taking the risk of putting all your eggs in one basket.” Finally, the venture capitalist is a proxy entrepreneur!
In addition, working in venture capital involves touching on all facets of the company, to get in touch with each of them (HR, logistics…); this versatility is sought after and appreciated by start-ups.
Venture Capital’s largest funds in France and Europe
Behemoths are breaking their head, such as Alven Capital, which closed the 250 million euro raising for its fifth fund at the start of 2017. Similarly, Partech Ventures has increasingly established itself as a giant in the sector by raising 400 million euros (nearly one billion raised between the beginning of 2016 and mid-2017). Omnes Capital has also completed some good operations. Ardian, through its specialist fund Ardian Croissance, is also very active in this segment and focuses on companies valued between 2 and 10 million euros that have a strong development potential.
The map below highlights the most dynamic funds in each European country, in terms of the number of companies helped. In France, Alven Capital is taking the lion’s share, with 100 companies helped in 17 years: this is still lower than in the German neighbour High-Tech Grunderfunds, a European leader according to this criterion with more than 150 start-ups accompanied, but ahead of the British funds.
Biggest fundraisers in 2018 in France
Some French start-ups have completed major fundraisers in 2018. Here are the first six:
6. Quantum Surgical, which raised 42.8 million euros (series A) to develop and democratize its treatment for mini-invasive liver cancer.
5. Dynacure, with 47 million euros raised (series A also) with the aim of developing new treatments to treat children with serious illnesses. Bpifrance in particular contributed.
4. OpenClassRooms, with 51 million euros raised in May, largely from the American investor General Atlantic. It is an online learning platform.
3. Ledger, with 61 million euros raised in Series C from investors such as Cathay Capital, an extremely active VC fund resulting from a Franco-Chinese merger, to continue its business of securing bitcoin portfolios.
2. Dataiku, 88.5 million euros in series C. The goal is to continue to develop its machine-learning data analysis software. Alven Capital has taken a stake in the startup, which is considering an IPO in the coming years.
1. Voodoo, a specialist in video games on smartphones, with 172 million euros raised from Goldman Sachs, which now controls between a quarter and a third of the capital. The company had raised only 1.5 million euros since its inception in 2013.