In review: venture capital in France

All questions

Overview

In France, the private equity market has been mature and structured for more than 25 years. In recent years, however, it has experienced a period of extremely strong growth, regularly breaking records in terms of fundraising and investment. The market is made up of more than 400 management companies (366 of which are registered with France Invest, the association that brings together all the funds on the market). Together, these players raise almost €30 billion a year from their investors and invest around the same amount each year in companies or infrastructure projects.

The private equity market is now the main driver of growth for innovative small and medium-sized enterprises (SMEs) in France. Nearly 9,300 companies are currently backed by investment funds, of which 2,681 were financed in 2022.

The investment fund ecosystem is divided between a limited number of large funds specialising in leveraged buyouts (LBOs) and many funds operating in the venture capital (VC) and growth equity markets. The main funds in the LBO market are Ardian, CVC Capital Partners, KKR, PAI Partners, Advent International, Astorg, Cobepa and The Carlyle Group. This is a market that has always been, and still is, very buoyant. In 2021, for example, Ardian raised a new LBO fund of €7.5 billion, a record in France and 60 per cent more than the previous fund raised in 2016.

The current period is also very favourable for VC funds (Bpifrance, Eurazeo, Elaia Partners, Serena Capital, Partech Partners, Alven Capital and Newfund). The main sectors financed are industry, digital, healthcare (including biotechnology) and renewable energy. Last year, digitalisation and technological innovation brought this market to an exceptional stage, symbolised by the creation of ‘French Tech’, an ecosystem financed and supported by public funds. A secretariat of state has been created to manage the digital transition.

Several new funds are also being set up to invest in infrastructure projects. This part of the sector is also growing rapidly: €16 billion was received by the funds from investors in 2022 and 17.2 in 2021, compared to €5 billion in 2020 and €9.9 billion in 2019. Forty-two funds invested more than €11.6 billion in 176 infrastructure projects (mostly renewable energy sites and telecommunications) in 2022.

Year in review

French investment funds raised €25.5 billion in 2022, up from €24.5 billion in 2021, an increase of 4 per cent over 2021 and 38 per cent over 2020. All figures refer to investment funds registered with France Invest. This is a strong increase after 2020, when funds suffered from the effects of the covid-19 pandemic. Capital invested by French investors accounted for 61 per cent of all private equity capital raised last year, compared to 47 per cent in 2021. This change shows that foreign investment is back in France after a short pause during the pandemic.

In 2022, there was a significant increase in funds of more than €1 billion. While these funds were not present in 2021, they accounted for 32 per cent of total funds in 2022. Investment funds under €100 million have set a new record for fundraising, with €6.6 billion raised in 2022 (a figure similar to that for 2021). These funds aim to acquire new resources to support SMEs and medium-sized institutions in the coming years (the funds raised will be invested over the next five years). The French technological environment, which favours start-ups, certainly explains the development of VC activity.

The main investors in French investment funds are insurance companies (20 per cent of the total, up 24 per cent on the previous year), funds investing in funds (16 per cent, down 37 per cent on the previous year), individual investment funds and family offices investing in funds through 323 vehicles created by fund managers (16 per cent, down 3 per cent on the previous year), public institutions (13 per cent, up 36 per cent on the previous year) and pension funds (11 per cent of the total, up 83 per cent on the previous year).

Despite a decrease compared to 2021 (€7.2 billion), the level of venture and growth fundraising remains higher in 2022 (€5.6 billion) than in 2020 (€5.2 billion). As a result, the success of investments in start-ups and medium-sized companies in France (€13.2 billion; a decrease of 17 per cent compared to 2021) remains more significant than investments in LBO funds (€12.3 billion; an increase of 27 per cent compared to 2021).

In terms of investment, the total amount of investment in French companies in 2022 decreased by 8 per cent compared to 2021, but still represents an increase of 31 per cent compared to the amounts invested in 2020. In fact, €24.7 billion will be invested in 2022, compared to €27.1 billion in 2021. The decrease in investment amounts between 2021 and 2022 is due to the decrease in investment not only in France but also in Europe during this period. In fact, investment amounts in Europe have decreased by 17 per cent between 2021 and 2022. In 2022, 54 per cent of investments were reinvestments. These figures indicate a small increase in reinvestments compared to the average annual weight of investments between 2012 and 2021. They accounted for 52 per cent of total investments during this period. The funds supported their portfolio companies through the difficult pandemic period.

In 2022, the largest share of investment was in industrial goods and services (24 per cent of the amount invested). This is undoubtedly due to the government’s ‘France 2030’ plan, which aims to support industrial start-ups and SMEs, and deep-tech companies (start-ups offering products or services based on disruptive innovations), in order to create new industrial sites in France by 2025. Information technology and digital followed by medical, pharmaceutical and biotech each accounted for 20 per cent of the amounts invested. Investment in the latter sector has increased significantly since 2021 as a result of the covid-19 pandemic. This pandemic has led to an increase in telemedicine, online prescriptions and home emergency care.

In 2022, 75 per cent of the supported companies were based in France, for 67 per cent of the invested amounts. This percentage has remained stable since 2021 but remains lower than in 2020, which shows that French funds are becoming increasingly international and are investing more abroad.²

Legal framework for fund formation

i Legal structures for investment funds in France

There are several structures for investment funds in France. The choice between these different structures is determined by legal and tax considerations. It also depends on the profile of the investors to whom the fund will be marketed: non-professional or professional investors.

Concerning funds open to non-professional investors, VC funds mainly take the form of VC mutual funds (FCPRs) and their variants, namely innovation mutual funds (FCPIs) (investments in innovative companies) and local investment funds (FIP) (investments in companies located in a specific geographical area).

Funds reserved for professional investors often take the form of specialised professional funds (FPSs) or professional private equity funds (FPCIs). The société de libre partenariat (SLP) created in 2015 also constitutes a specialised professional fund that can be used for investment capital.

All of these funds – whether or not reserved for professionals – fall under the category of alternative investment funds (AIFs) as defined by the Monetary and Financial Code and subject to regulation and supervision by the French Financial Markets Authority (AMF). These AIFs ‘by nature’ are covered by the European AIFM Directive of 8 June 2011 – introduced in France by the Order of 25 July 2013 – and are defined as those that:

1. raise capital from several investors with a view to investing it, in the interest of these investors, in accordance with an investment policy that these AIFs or their management companies define; and
2. are not undertakings for collective investment in transferable securities (UCITS).

In France, this category of ‘AIF by nature’ is distinct from the category of ‘Other AIFs’, which are investment vehicles that, although AIFs, are not explicitly covered by the French Monetary and Financial Code.

Venture capital funds may also be set up in the form of French ordinary companies such as a société anonyme (SA) or a société par actions simplifiée (SAS) which are intended to manage investments in unlisted companies. In addition to these ordinary companies, France has a specific structure dedicated to private equity known as the ‘venture capital company’ (SCR). The SCR is a joint-stock company whose purpose is to acquire stakes in unlisted companies and which benefits, as do its partners, from a preferential tax regime. The SCR is part of the ‘Other AIF’ category and benefits under certain conditions:

1. from an exemption from corporate income tax; and
2. from a privileged regime for its distributions and capital gains on disposal.

Specific structures dedicated to VC in France (notably FCPRs, FPSs, FPCIs and SCRs) are more often chosen than ordinary companies because of the special tax features that they offer, which ensure investors a principle of tax neutrality. The absence of effective taxation at the level of the legal structure is an essential criterion for the choice of an investment vehicle. The vehicle must not create any tax friction and the investors – members of the vehicle – must therefore be taxed as if they had invested directly in the target portfolio.

For non-professional investors, certain structures also offer additional tax advantages at the time of entry. This is the case with FCPI and FIP funds, which offer tax reductions simply by subscribing to shares. In addition to tax criteria and the distinction between professional and non-professional investors, the choice of fund depends on the asset class that the fund intends to hold. Some funds are in fact subject to investment quotas and asset structuring ratios laid down by law.

Thus, for funds intended for non-professional investors:

1. the assets of FCPIs must be composed of financial instruments defined by law and issued by companies qualified as innovative; the innovative character results in particular from a minimum percentage of research expenditure; and
2. the assets of FIPs must consist of financial instruments defined by law and issued by companies operating mainly in establishments located in the regions chosen by the fund.

Regarding funds reserved for professional investors, FPCIs must meet strict requirements on the composition of their assets, unlike FPSs. FPCIs are subject to investment quotas and asset structuring ratios set by law. Conversely, FPSs are not subject to any investment or holdings ratios. The rules of the FPSs may, however, define them but they are contractual and not statutory.

An FPS is therefore preferred to an FPCI for the desired asset class. This FPS can take the form of a mutual fund (SICAV) or a limited partnership (SLP). The SLP was created in France in 2015 to offer private equity players a vehicle with great flexibility in organising its operations. The SLP is not limited by law in the type of assets in which it can invest, which makes it a flexible vehicle. It can therefore be used for various types of investment strategies and can hold any type of asset (e.g., financial instruments, receivables and real estate).

ii Fund formation

The procedure for setting up most of the funds mentioned above does not follow the same legal regime depending on whether professional or non-professional investors are involved. The creation of funds open to non-professional investors (FCPR, FCPI and FIP) is subject to prior approval by the AMF. These funds are subject to strict rules on investment ratios, risk spreading and control. Conversely, funds open to professional investors (FPS, FPCI, SLP) are simply declared funds that require prior approval from the AMF. The formalities for declaring the formation of these funds are carried out retrospectively.

FCPRs (and their variations, FCPIs and FIPs) – for non-professionals – and FPSs and FPCIs – for professionals – share the common characteristic of being entities without legal personality. These funds represent a co-ownership of financial instruments without legal personality. The investors in the fund are therefore not shareholders of the fund, as it is not a company. They hold units in the fund that give them co-ownership rights in the fund’s assets. Since they do not have a legal personality, these funds necessarily require outsourced management. The law provides that these funds are managed and represented by a management company that must be approved by the AMF. To obtain approval, the management company must describe a programme of operations for each of the services that it intends to provide. This includes describing the funds that it plans to establish and the management guidelines for these funds. It is the management company that prepares the fund’s constitutive documents The law also grants the management company the authority to take legal action to defend or assert the interests of unit holders. Management companies are remunerated by management fees, which are governed by the internal regulation of the fund. The management company does not have physical possession of the fund’s assets. To enhance the security of investors, the fund is required to appoint a custodian, which may only be chosen from among the institutions designated by law (e.g., banking institutions).

The custodian’s mission will be to hold the assets held by the fund and ensure that the fund’s decisions are in line with the applicable legal and regulatory provisions.

The SCR or the funds incorporated as companies, in particular the SLP, are, however, entities with legal personality. They therefore have their own management bodies and can in principle manage themselves. Their management bodies are responsible for both the day-to-day management of the company within the meaning of company law and the management of their portfolio. However, they may choose to delegate the management of their portfolio to a management company. This will be the most common case in practice because the law provides that when an FIA does not delegate the management of the capital raised globally, it must itself meet the conditions applicable to portfolio management companies and comply with the provisions applicable to such companies, and thus seek approval. Therefore, in practice, these companies call upon ad hoc management companies. Some ‘Other AIFs’, such as SCRs, may not be required to have an AMF-authorised management company if their assets under management are below the thresholds for application of the AIFM Directive and they have no non-professional investors. If these criteria are met, they may be managed by a legal entity that is not a portfolio management company and is therefore not authorised as such. The advantage of an SCR over an FIA ‘by nature’ is that it can avoid the obligation to be managed by an AMF-approved management company. However, professional investors prefer collective investment vehicles managed by management companies, which have to meet strict requirements to be authorised by the AMF and are subject to its supervision.

iii Marketing of funds

The act of marketing AIF units consists of presenting them on French territory by various means (e.g., advertising, canvassing and advice) to induce a client to subscribe to or purchase them. The marketing regime is territorial; that is, each act of marketing to an investor resident in France at the time it is carried out will be subject to the regime defined by the AMF. However, the AMF has specified that there is no marketing when the subscription is made in response to a request from an investor, not as a result of a solicitation, concerning an AIF specifically designated by him. This is passive marketing or ‘reverse solicitation’. The AMF has also implemented the pre-marketing regime, specifying that the practice of management companies or third parties acting on their behalf approaching a maximum of 50 investors to assess their appetite prior to the launch of an AIF does not constitute marketing when:

1. it is conducted with professional investors or non-professional investors whose initial subscription would be equal or greater than €100,000; and
2. it is not accompanied by the delivery of a subscription form or documentation containing definitive information on the characteristics of the fund that would enable these investors to subscribe or commit to subscribe to the units of the AIF to which this appetite test relates.

Management companies are authorised to market the units of the funds that they manage and may therefore engage in canvassing. The management company may also provide investment advice (i.e., personalised recommendations) to the investor.

Fund agreements

FCPRs (and their variations, FCPIs and FIPs) – for non-professionals – and FPSs and FPCIs – for professionals – are governed by a set of internal rules. The operating rules of funds set up as companies will be described in their articles of incorporation. The fund rules are the reference document that governs relations between investors and the management company and describes the fund’s operating rules.

The rules of a fund reserved for professional investors will be negotiated with the investors. The following provisions will typically be found:

1. a ‘key person’ clause requiring members of the management team to devote part of their professional activities to the fund. In the event of the departure of one of these members, it is usually provided that the fund’s unit holders have the right to request either the definitive termination of the investment period or the transfer of the management of the fund to another management company;
2. a ‘penalty’ clause under which, in the event of misconduct by a member of the management team, the unit holders may vote, by a specified majority, for the removal of the said member and the loss of carried interest rights; and
3. a ‘change of control’ clause, which provides that a change of control of the management company is subject to the prior approval of the fund’s investors.

The rules of a fund reserved for non-professional investors will not contain this type of clause and will most often constitute a contract of adhesion. The fund rules will be drawn up at the sole initiative of the management company and the investor will be bound by them without being able to negotiate them beforehand. For these non-professional investors, the rules will be supplemented by an investor information document (DICI) containing the essential information necessary for the investor to make a decision and are aimed at helping the investor to understand the risks associated with VC investments.

The regulations or articles of association of a fund (whether professional or not) must contain the information required by the AMF, in particular:

1. the minimum amount of assets;
2. the management orientation (i.e., the investment objective and strategy);
3. the principles implemented to protect the interests of unit holders; and
4. the economic sectors targeted, the types of financial instruments used and the geographical areas targeted.

The regulations will also specify the duration of the fund, the terms and periods for subscribing to units, the fund’s management structure and any costs borne by the unit holder.

The constitutional documents of the investment entity (fund rules or company statutes) also set out the terms and conditions of the carried interest mechanism. Carried interest allows the fund management team to receive a portion of the capital gains realised by the company. Carried interest represents a preferential right granted to the management team on the performance of the investment company and is generally set at 20 per cent.

Investors accept this dilution of their financial rights in favour of the management team, provided a certain level of profitability is achieved. In principle, no carried interest is paid until the investors have been repaid their contributions plus a hurdle rate of return. This hurdle is often equivalent to an annual return of between 6 per cent and 8 per cent of the amount of the investors’ contributions.

In France, carried interest rights are generally structured as a special class of shares issued by the investment company. France also applies a preferential tax regime to the carried interest mechanism, which allows the management team to benefit from the capital gains tax regime on the sale of corporate rights and securities and to avoid taxation of the carried interest as salary and wages.

This preferential regime is specifically designed to apply to certain funds covered by the law and subject to certain conditions.

Fund management

Management companies that manage and represent VC funds are subject to several obligations throughout their existence. The AMF’s General Regulation requires them to have dedicated material and technical resources that are sufficient and appropriate for the instruments used and the proposed management, and control and security systems. They must therefore at all times be able to justify a level of funds at least equal to the thresholds provided for in the AMF General Regulation.

They must have procedures in place to detect any risk of non-compliance with their professional obligations. They are required to have a compliance and internal control officer (RCCI). Management companies may be sanctioned by the AMF Enforcement Committee for non-compliance with applicable regulations. The AMF reiterates that management companies must comply with rules of good conduct and act honestly, fairly and professionally in the best interests of investors.

They should therefore implement a risk management policy that identifies the risks of the collective investments they manage. A management company should monitor liquidity risk by the fund to ensure an appropriate level of liquidity for each fund, taking into account investment strategies and redemption policies. To monitor liquidity risk, the management company must regularly conduct stress tests, under normal and exceptional liquidity conditions, which allow it to assess the liquidity risk of the funds.

Management companies must also comply with transparency requirements regarding investors and the AMF. They must provide information:

1. to AIF unit holders by publishing an annual report for each financial year for each AIF that they manage; and
2. to the AMF by providing various information, including on the composition of the AIF’s assets and on the monitoring of the AIF’s liquidity risk described above.

On an ancillary basis, asset management companies may be authorised to provide certain investment services as defined by MiFID II. These services are investment advice and the reception and transmission of orders on behalf of third parties. These services may only be provided if the management company is expressly authorised by the AMF to provide them.

Raising capital by start-ups

i Overview

The number of start-ups in France experiences an approximate annual growth rate of 20 per cent. There are currently more than 22.000 start-ups. These start-ups raised capital of over €5.3 billion in 2020, €12.4 billion in 2021 and an unprecedented €14.1 billion in 2022.³ The world of French Tech is divided into several ecosystems. These ecosystems are all actively supported by the French government and more precisely the Public Investment Bank. Within these various ecosystems, numerous start-ups have successfully completed multiple rounds of investment:

1. advertising and marketing companies (adTech and marTech) such as Contentsquare, Akeneo and Weglot;
2. finTech and assurTech (finance and insurance companies) (Alan, Qonto, Swile and +Simple);
3. foodTech (Novolyze , Microphyt and Lisaqua);
4. bioTech and medTech (Doctolib, Synapse and Padoa);
5. entertainment and mediaTech (Pianity, VRrOOm and Kinetix);
6. mobility companies (BlablaCar and Shippeo);
7. HR and work tech (Malt and PayFit);
8. industrial companies such as Exotec;
9. the retail and e-commerce sector with many start-ups such as BackMarket, DataDome and Glopal; and
10. AgriTech such as Gourmey, Agriconomie, Naïo Technologies and HappyVore.

For VC, there were 1.400 rounds of financing for start-ups in 2022 compared to 1.300 rounds in 2021.⁴ Since 2021, we have been witnessing an unprecedented situation characterised by an increase in investment intentions in innovation capital and a significant increase in realised investments. In addition to the number of rounds being higher than 2021 (albeit by 8 per cent), the investment amounts have also increased by 12 per cent. In 2022, French Tech completed 10 jumbo investments (i.e., rounds of over €250 million, a category that did not exist before 2019), 17 mega investments (i.e., rounds of over €100 million) and 46 Series C operations between €40 million and €100 million (totalling 73 compared to 66 in 2021).⁵

In recent years, France has seen the emergence of ‘trust-based’ seed rounds. This new version of seed funding is based on the personality of an entrepreneur who has already created and successfully sold start-ups.

France currently has 29 ‘unicorns’.⁶ Unicorns are start-ups with a valuation of more than US$1 billion. Unicorns are also companies whose growth is so rapid that they can raise several million dollars or euros in a single round of financing to continue to develop.⁷ Thus, the business model of unicorns is initially based on rapid growth, financed by external funds that have to make bolder bets to avoid missing out on great opportunities, before focusing on the unicorn’s profitability and revenues.

The most successful unicorns in France are Doctolib (US$6.4 billion), Back Market (US$5.7 billion), Contentsquare (US$5.6 billion), Qonto (US$5 billion), Sorare (US$4.3 billion), and Mirakl (US$3.4 billion). They are closely followed by Alan (insurance) and ManoMano (e-commerce and direct-to-consumer), valued at US$2.85 billion and US$2.6 billion, respectively.

The first half of 2022 started with €8.4 billion raised in funding.⁸ In the second half, the inflationary economic context and the increase in interest rates slowed down the progress of fundraising, reaching only €5.1 billion.⁹ However, thanks to the performance displayed in the first half, start-up fundraising in 2022 increased by 17 per cent compared to 2021.¹⁰ Indeed, the first half of 2022 was fuelled by significant fundraising rounds, such as Doctolib (€500 million), Qonto (€486 million), EcoVadis (€578 million), BlackMarket (€450 million) and Exotec (€295 million).¹¹

ii Raising capital

The start-up development process in France includes fundamental key stages and for each stage has its own financing methods:

1. concept development: the start-up is financed by its founders’ own funds;
2. creation of the company (initiation): the start-up is financed by its founders’ own funds or by its friends and family (also known as ‘love money’), by business angels and with loans (Bpifrance Investissement creation guarantee and participating loans, loans of Scientipôle, Réseau Entreprendre, Initiative France, etc.) and tax advantages (e.g., tax credits and reduced employer’s contributions);
3. seed or pre-seed: at this stage the start-up is financed by raising seed capital (usually between €500,000 and €1 million), by business angels or by public funding;
4. scaling: the start-up is financed by a Series A fundraising (between €1 and €5 million) or by public funding; and
5. expansion: the start-up is financed by a Series B or C fundraising (more than €5 million) or by public funding.

All stages of financing with the exception of the initial public offering (IPO) are governed by French common law (i.e., the Civil Code, the Financial and Monetary Code and the Commercial Code). The founders and investors establish a contractual relationship between them by entering into the investment agreement, shareholders’ agreement and, as the case may be, a representations and warranties agreement.

Early stage

Crowdfunding, introduced in France in 2014,¹² is only used in the early stages of development whether in the form of equity, donations (with or without consideration), loans or royalties (if the start-up is able to generate turnover quickly). The first two are the most commonly used by French start-ups: equity to increase equity capital and encourage love money, and donations, especially with consideration, which correspond to pre-sales to test the market, carry out a communication campaign and finance the industrialisation of the first series. Crowdfunding is rarely, if at all, developed for Series A, B and C financings, as originally it does not organise liquidity and does not set a framework for enhanced reporting to investors. Thus, equity crowdfunding ultimately creates the situation that French company law has always sought to avoid: a shareholder base weakened by its fragmentation and without an effective exit route.

Initial coin offering (ICO), a hybrid between the crowdfunding and fundraising, represented €80 million in 2017, with three transactions realised in France (Beyond the Void, iEx.ec, Domraider).¹³ This cryptocurrency fundraiser allows blockchain start-ups to access funding very quickly. While cryptocurrency-related markets have fallen sharply in 2018, the French government has adopted the ‘Pacte’ Acte,¹⁴ which gave a legal framework to ICOs and the possibility for the French Financial Markets Authority (AMF) to issue a label to serious projects and with certain guarantees such as a mechanism for securing the funds raised. The AMF’s General Regulation gives details of the optional visa to which project holders may subscribe. The issuer of tokens must be a legal entity established or registered in France. ICOs must be subscribed to by more than 150 people from the general public. In other words, no fundraising from a few large qualified investors. Despite the potential income from tokens and an investment opportunity open to all internationally, ICOs do not have all the advantages: there is still a very unstable legal and regulatory framework (e.g., KYC), the lack of information and knowledge of individuals, which facilitate fraud and scams, and the volatility of tokens whose value depends entirely on the project being financed. This explains why the number of projects currently awaiting approval from the AMF can be counted on the fingers of one hand.

Series A and alternative instruments

While French start-ups benefit from strong support from the French government and take advantage of all the opportunities offered by the digital world at an early stage, traditional equity fundraising is still the most common way to raise capital. There are more than 150 funds in France that intervene at different stages of the company’s life (seed, VC, development funds) and are often sector-specific. Seed financing is widely used by funds through the subscription of preferred shares, which give investors liquidation preferences, information rights and accelerated dividends. However, the issuance of preferred shares requires the supervision of the company’s auditors. French law therefore allows some flexibility for simplified joint stock companies (sociétés par actions simplifiée), the type of company most often used by start-ups. These companies can issue shares with the same rights without the intervention of a special auditor. In this case, this type of shares is included in the company’s articles of association, which usually contain a clause allowing these shares to be converted into preferred shares at the investor’s request. In both cases, the parties essentially enter into:

1. an investment agreement setting out the conditions precedent, representations and warranties, if any, and other conditions to their entry into the share capital of the company; and
2. a shareholders’ agreement to set out the provisions governing the transfer of shares, the liquidation preferences, the liquidity process (future IPO conditions) or other exit possibilities such as the drag along, the good and bad leaver options of the current managers of the company and non-compete provisions, which are particular key terms used in the vast majority of transactions at this stage of financing.

Even in simplified joint-stock companies, raising funds by way of share issue is a long and selective process, which is sometimes necessary (in certain sectors such as biotechs, which are very capital-intensive with a very long time to market), and often recommended if one wishes to accelerate and develop rapidly internationally, but which is not the only possible development model for young innovative companies. More modest growth based on turnover on a small enterprise model is a real economic alternative, particularly for managers who wish to remain at the head of their project for the long term. The practice is increasingly oriented towards alternative financing methods, with a common philosophy: immediate payment of funds and conversion into shares at a later date, according to a future valuation (e.g., AIR warrants (BSA Air accord d’investissement rapide), convertible bonds and bonds redeemable in shares). These securities skilfully postpone the delicate issue of valuation of the company. The common philosophy of these new fundraising methods is simple: initially, an immediate payment of funds by the investors to the company; then, in the long term, a conversion into shares of the amounts made available to the company, according to a valuation decided at the time of this conversion. In most cases, the conversion takes place at the time of the next significant fundraising and on the basis of the price per share retained at the time of this fundraising, applying a discount of the order of 15 per cent to 25 per cent, to reward the risk taken by the investor.

While convertible bonds and bonds that are convertible into shares are widely used and well known to investors, who can easily balance the remuneration of the bonds (through interest, often paid at maturity and that may or may not be added to the conversion basis) and the level of discount provided at the time of conversion, they have added AIR warrants, previously used by friends and family for their simplicity, to the list of assets in which they invest. These warrants are inspired by Ycombinator’s ‘Simple Agreement for Future Equity’, which allows for rapid financing by postponing some of the stages required for a traditional equity investment, in particular the valuation of the company and discussions on the shareholders’ agreement. This instrument has the advantage of being turnkey, now well known on the market and available in open source.

The AIR warrant gives the holder the right to subscribe for a number of shares at par value, which is determined according to a formula depending on the occurrence of a subsequent event (e.g. a new round of financing, an event leading to a change of control of the company, a merger or an IPO). This subsequent event allows the valuation of the company to be determined within the framework of a floor and a cap valuation established in the AIR warrant issue contract. There has therefore been a massive shift in practice towards AIR warrants, which, with virtually standardised legal documentation and a very limited shareholders’ agreement, make it possible to combine efficiency, speed of execution and cost control, in particular because of the absence of legal formalities. However, since the Pacte law, companies have had to engage an auditor to give an opinion on the issue price of an AIR warrant, even though the purpose of the latter is to be valued, in particular, by reference to an unknown future valuation. In conclusion, this reform introduced by the Pacte law will lead to an increase in procedures and costs, especially for early stage start-ups, which need to carry out their operations urgently and at a lower cost.

Later stage

Despite the strong development of start-ups in France, they have struggled to raise funds at later stages (i.e., above €50 million) and at the IPO stage, due to the lack of investors specialised in these segments in France. However, French Tech is beginning to change this perspective. The number of funds specialising in growth equity is at an all-time high, comprising both typical venture funds, which are raising more money than in the past in new vehicles to finance Series B and C rounds, and leveraged buyout funds, which are moving into debt-free equity investments. Institutional investors are increasingly being encouraged by the French government to devote a greater proportion of their allocations to the financing of French innovation capital funds, with a view to managing more than €1 billion in favour of unlisted companies at a later stage, and to the development of global technology funds for listed companies, which will allow the structuring of leading expertise in the financing of technology companies in particular in France.

Exit

In France, while the myth of the IPO remains important, recent years have shown that this type of exit accounts for only a marginal percentage of divestments. The failure of IPO deals can be linked to the exponential development of international accounting standards, but also to governance codes and stock exchange regulations that make the IPO process more difficult.

The sale of unlisted companies is therefore more advantageous for buyers who are focused on the long-term development of the company. Moreover, for private equity investors wishing to exit a company’s share capital, an IPO represents a significant cost, between 5 and 10 per cent of the funds raised, and administrative and accounting obligations.

In contrast, in France, the most popular sales are to industrialists or private equity companies. An exit process to an industrial buyer is based on a completely different logic than an IPO. The industrial buyer is guided not only by financial criteria but also by economic and industrial criteria.

The buyer’s objective is to develop the business by generating goodwill through industrial or commercial synergies. Very often, the exit by an industrialist allows them to enter a new market in his or her own field of activity. However, an industrial exit can raise obvious competition issues and complicate the sale process by requiring approval from the French antitrust authority or the European Commission. Furthermore, in the context of an exit by industrialists, sellers are often confronted with the question of the representations and warranties given to the industrialist. In practice, it is clear that industrialists, when selling their businesses, give representations and warranties to the purchaser. Conversely, when industrialists acquire start-ups, the sellers are confronted with this issue and are often forced to give representations and warranties that may involve the payment of substantial indemnities.

The exit by way of sale to the management is also a common exit strategy in France. In 2021, exit by transfer to the management represented 6 per cent of the amounts sold (i.e., €740 million). In practice, the managers wishing to acquire the shares held by the outgoing investor seek both a bank loan and an investment fund to participate in the acquisition alongside them, while remaining in the minority.

Outlook

Environmental, social and governance (ESG) criteria, which used to be taken into account with caution, are now receiving increasing attention from VC funds. Beyond the strategy of differentiation adopted by some investors, criteria related to corporate responsibility or seeking to integrate the notion of sustainability are now an important part of the investment models of many funds on the French market. Until recently, the main focus was on the organisation of corporate governance. However, a significant part of the VC industry is now developing a growing sensitivity to social and sustainability issues.

This integration of ESG principles is reflected not only in due diligence but also in highlighting companies with a positive impact on the economy. In addition, the performance of an investment and the value creation process are no longer separated.