Monday Note

Last week, we looked at the two components of the “other” French Paradox.

First, the Valley aura helps a tiny Palo Alto start-up sell its technology in France. But it doesn’t work the other way around: a Lyons high-tech company will get a polite reception but no orders from the likes of HP, Google or Oracle. While the Valley does sell in France, to sell in the Valley you need to be of the Valley.
Second, French taxpayers unwittingly subsidize VC-backed Valley startups. Graduates from public universities or grandes écoles such as Polytechnique, Centrale and many others come to the Valley and contribute their skills and energy to the companies we, American venture capitalists, invest in. (In passing, thanks to a reader who reminded me HEC, one of the leading French business schools is a private institution.)

The French speak of “refaire le monde au Café du Commerce”, the phrase refers to a suitably lubricated theorizing of the World As It Ought To Be. In moderation, a healthy way to pass the time with friends and to keep one’s debating skills sharp. With little risk of dealing with the “mere matter of implementation” – the one I’ve decided to address today.

After a quarter century in the Valley, after meeting countless French entrepreneurs, students, executives, elected officials and high-level civil servants; after indulging in more than a few of the Café du Commerce sessions mentioned above, in the Valley and in Paris; after more than seven years inside a Palo Alto venture firm, I finally had an idea, one of those that come with the pleasant sensation of the retroactively obvious.

Here goes: Resolve the paradox, build a venture firm exclusively focused on helping French high-tech companies become full members of the Valley ecosystem. And open the firm, its first venture fund, solely to French investors.
This isn’t theory, I’m doing it. As we speak, my co-founder and I have assembled a team, we’re polishing our pitch and prepare to go “on the road”. In early 2010, we’ll be meeting with potential Limited Partners, LPs, the accepted term for investors in a fund like ours, called ArèsVentures.

For French taxpayers, the fund reverses the flow of money; its profits, plowed back in the French economy, provide a return on their investment in higher education; we put the Valley to work for them.
For French entrepreneurs who want to see their work achieve its full potential, who want to see their young company spread its wings on the world stage, we provide the fuel for the journey, the knowledge, the cultural bridge, a crucial ingredient, and the ecosystem connections.

For our investors, we feature what is known in our jargon as a “proprietary deal flow”. In plainer English: Valley VC don’t go to France looking for French start-ups to invest in; French VC don’t go to the Valley looking for young companies to put money into. We invest in companies US VC don’t look for, in ones French VC may view as no longer meeting their risk profile as their management team moves to the Valley.
In addition to the deal flow advantage, we invest in plants, not in seeds, and we help the plants move to the Valley. Less metaphorically, where I work, we often make what is called seed investments. An entrepreneur comes to us with an idea, we like both and decide to risk a relatively small amount of money, say $250K to $500K, into developing, debugging the idea or the prototype. If things go well, we put together a group of VC, a syndicate, and we invest “a few”, 2 to 5, millions of dollars in the company. This we traditionally call a Series A round.
In our experience, making seed investments remotely doesn’t work, these need to be closely monitored in the early formative stages of the idea, of the business model. What I meant by using the word plants above is we’ll invest in companies that have grown past the seed stage, ones with a product, even if it’s not yet fully mature, and with a legible business model, even if it’s not yet generating substantial revenue.

As a result, for our investments and our investors, our LPs, the product and business model risks are lower than they are in investments made at an earlier seed stage. And liquidity happens sooner: for our portfolio companies (the term we use to designate the collection of startups we invest in), it will take less time to “exit”. One possible exit is an IPO (Initial Public Offering, becoming a publicly-traded company). IPOs are not as likely as they once were; they might come back when the economy really recovers. Right now, the more probable exit is an acquisition by a larger enterprise in need of innovative products and people.
My statements about the lower risk need to be nuanced:  we move a French company’s management team to the Valley. (Note I don’t say the whole enterprise, more on this later.) Such relocation comes with non-product, non-business model risks. We plan to mitigate these by having enough financial resources to deal with the transplanting challenges.

Speaking of which, financial resources, we’re raising 250M€, enough invest in 25 companies over the course of the 4 year investment period of the fund. In practice, this represents an average of 20M€ per company. You read this number right: as we always invest in a syndicate, our co-investor doubles the average 10M€ our firm deploys, hence 20M€ per company, considered a solid number in our industry.

Today, I leave many questions unanswered. What about jobs in France? What do I mean by moving the management team vs. transplanting the whole enterprise? What is the business model of a venture fund such as ours, its mechanics? To say nothing of our differentiation and of the challenges we’re staring at.

Stay tuned for upcoming Monday Notes.

— JLG@mondaynote.com

See also JLG’s blog Arès Ventures (in French)

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