Monday Note

by Jean-Louis Gassée

As promised last week, let’s dig into a venture fund’s key numbers.

Limited Partners, LP, institutions or individuals put money into the fund. We, the General Partners, GP, make and manage the investments and we split the profits with the LP as the sole compensation for our services.
Over time, the split has varied with the industry’s prosperity and the fund’s reputation, it went as high as 35% of the profits for the GP but, as this WSJ story belatedly explains, is now back to about 20%. In our vernacular, that number is called the Carried Interest or, for short, Carry.
A second number, the Management Fee, needs a bit more elaboration.
As the Carry did, it varied and went up to 2.5% of the fund’s capital; it is now pegged at a fairly standard 2% per year. The Management Fee provides the money needed to run the firm’s operations, pay the rent, associates’ salaries, travel expenses and the like. It also provides fodder for misunderstandings.

The Management Fee is a loan, not a stipend. For the GP to get its 20% of the fund’s profits, both the capital, the money invested by the LP and the Management Fee must be repaid first.
When funds become very large, say a billion dollars or more, the Management Fee gets correspondingly large and can encourage spending habits, thus generating criticism the GP is more interested in the fee than in making money for its investors.
But, you’ll object, the advance must be repaid before profit-sharing kicks in. Yes…, and what happens if the fund doesn’t make money? Are the LP losing money while the VC enjoys a good time, living off the Management Fee? The answer depends upon the way the fund agreement is written. If it contains a Clawback clause, the GP is obligated to return the “unearned” fee. As you can imagine, this leads to interesting exchanges during the fund’s formation and, much later, if it turns out it loses money.

To summarize: profit sharing (Carry) of 20%, a yearly advance of 2% of committed capital (Management Fee), to be repaid before profit sharing kicks in. Read More »

Two weeks ago, I discussed what I called The Other French Paradox, that is how French taxpayers and French companies are at a (curable) disadvantage in Silicon Valley. Last week, I “shared” (we’re in California) my own plans to deal with the twin problems: a venture fund whose profits reverse the flow of money back to France and whose role is to help French high-tech start-ups achieve their full potential by becoming real members of the Silicon Valley ecosystem and, from there, by gaining access to Asian markets.

This week, as promised, I’ll deal with “mere matters of implementation”, questions and objections.

Sadly, I’ll explain the adjective in a moment, the first objection my compadres and I get is one of jobs outsourcing, or délocalisation: “When you transplant these companies to the Valley, French jobs disappear in the process.”
Understandably, if the company’s management team pulls up stakes and move to Mountain View or Palo Alto, there is a sense of loss, they’re gone, their salaries used to feed the local economy.
But, that’s where the “sadly” comes in, there seems to be little faith in the company’s success and in the resulting job creations back in France. Sometimes, I wonder if this lack of faith can’t be summarized thus, using a metaphoric pizza slice: to get a  bigger share, one can worry about its angle, is it 12 degrees or 15 degrees, or one can work to increase the pizza’s radius. Do we prefer a healthy but smaller company, all located in Brittany, or do we want an even healthier, larger enterprise, creating more jobs, both in France and in the US? Posed like this, the rhetorical question fails the “can you disagree” test, it’s framing.
For a way out of the frame, let’s turn to economic interest; in plainer English: making money.
The way we structure our investments in “transplanted” French startups keeps at least 50% of the engineering work, jobs, in France. We don’t do this because we’re nice guys, we want this because it makes economic sense. Let’s review. Read More »

by Jean-Louis Gassée

Foie gras, crême fraîche, butter, red wine — and lots of it! All these excesses leading to a higher life expectancy, to say nothing of the joys of sinning. That’s the legendary now official French Paradox. Scientists strain to explain the phenomenon: ‘It’s the phenolic compounds in the red wine’, they say. Me, I look at eating habits in my adopted country: restaurant chains like the Cheesecake Factory, “family-style” servings,  food everywhere, everyday, at all times in offices like Google’s.
Methinks there is no paradox just quantity, 360 degrees and 24/7 availability, as the recent but unmistakable widening of French bottoms attests.

No doubt, these must be Thanksgiving hangover-induced thoughts. Let’s turn away from arteries-clogging food and contemplate another set of incongruities.

Silicon Valley VCs (like me) are subsidized by the French taxpayer. Yes, bear with me, no fancy science, no magic involved.
It goes like this: a young kid performs well in high school, s/he is “tagged”, put on the higher education track, prep classes, “grandes écoles”, top-level business, government and engineering schools such as Polytechnique, HEC or ENA and their many local siblings. Such education is essentially free, that is paid by French taxpayers.
The young graduate starts working at one of the big French companies, Thales, France Telecom or Airbus. Soon, an alumnus calls: I’m at Google, or Apple, or Cisco, or this little Silicon Valley VC-funded start-up, come and join the fun. Indeed, graduates from prestigious French higher-education institutions are everywhere in the Valley. VCs have learned long ago to look beyond the “35 hours” and “5 weeks paid holidays” reputation. Actually, we know the “locals” got a little lazy over time, like New York Jewish families wondering why their sons and daughters now lose the Math Prizes to the children of Chines immigrants. First generation immigrants are naturally hungrier than the more prosperous third generation families. The famed Silicon Valley work ethic is too often a pose; new immigrants, in general, and French ones, in particular, are viewed as harder-working than some of the too-cunningly-adapted natives.
Paradoxically, that word again, the constraints, the obstacles of a highly state-regulated culture tend to sharpen creative skills — highly valued ones in our entrepreneurial Valley. In  France, defeating regulations is a national sport, a point of manhood. Read More »