French dreams of a start-up renaissance

On a Friday morning in a modest office block in eastern Paris, Bastien Cazenave is huddled with colleagues behind a computer screen. They are putting the finishing touches to the latest episode in his young company’s online murder-mystery game.

There is an air of quiet intensity as Pretty Simple Games releases its weekly instalment of Criminal Case, a sleuthing game that has rocketed up the social gaming charts this year. It is now the second most-played game on Facebook after King.com’s Candy Crush, overtaking those of Zynga, the biggest maker of Facebook games.

Criminal Case, the third game by Pretty Simple, has made the three-year-old company a global star of France’s start-up scene at a time when the country more often draws attention for the perceived business-unfriendly actions of its socialist government. Released in December, the game achieved 9.5m active daily users around the world in June. Mr Cazenave and his founding partner Corentin Raux say it will exceed €10m in revenues this year. “The margins are huge,” says Mr Cazenave. The founders expect to double their staff to more than 80 next year.

Pretty Simple is just one of hundreds of young French digital enterprises jostling to make a mark. A few kilometres away, Nicolas Brusson, a former venture capitalist, is busy recruiting more staff for BlaBlaCar, a ride-sharing online booking business he started with two colleagues in 2009 and which now has 3m users in five countries and 75 employees. He says France is a good place to start a business. “The reality is we get lots of help, lots of [state] soft funding and subsidies. In terms of initial funding, France is one of the best places.”

But like France’s grands patrons who run its leading companies, entrepreneurs at the start-up end of business have been worried by a series of steps taken by the government that have sent hostile signals to investors.

The country’s ability to foster new companies has never been more critical. With the economy stalled, unemployment rising and big companies shedding thousands of workers, new business development is vital to attracting investment and regenerating growth.

Some recent signals have been ominous. This year’s survey of inward investment by Ernst & Young, the professional services firm, showed a 12 per cent drop in new foreign investment pro­jects in France in 2012.

A move last year to raise capital gains taxes on investors cashing out of companies provoked a furious on­line revolt by internet entrepreneurs, styling themselves “Les Pigeons” – slang for “the suckers”. In May, Arnaud Montebourg, the leftwing in­dustry minister, provoked exasperation when he vetoed a move by Yahoo to take a controlling stake in DailyMotion, a video-sharing site.

Lots of starts, too many stops

●The number of start-ups in France leapt after a low-tax, low-bureaucracy “auto-entrepreneur” status was established in 2009 by then President Nicolas Sarkozy, with 550,000 new start-ups in 2012.

●Many of the start-ups, however, are sole traders or micro-businesses with few plans to expand. Croissance Plus, which studies growing businesses, has adjusted for this effect in its estimate that true business creation has stagnated at about 320,000 start-ups a year over the past six years.
●Croissance Plus says this level of business creation in France, at just under 9 per cent of existingbusinesses in 2011, was below Germany (12 per cent) and the UK (11.2 per cent), but above Italy (7.4 per cent).

●The main problem for France, says the lobby group, is the relative failure of companies to grow,
with a preponderance employing fewer than nine people (93 per cent versus 83 per cent in Germany).

“It sends a very negative signal to enterprises – ‘We are going to tax you to death on success, so you might as well take the Eurostar to London’ – which is pretty catastrophic for France,” says Mr Brusson. “And then it sends a signal to investors outside France of high taxes and instability. That’s what investors hate the most.”

This view is echoed by Jalak Jobanputra, managing partner at Future­Perfect Ventures in New York. “There is a concern when something like Daily­Motion happens,” she says. “It raises questions people already have about government policy. If there is a choice of another seemingly more pro-investor environment, that’s where investors will turn.”

The government tends to dismiss adverse headlines about its policies as “French bashing”. But it has reversed the capital gains plan and emphasises other tax incentives, such as a generous system of credits for research and development. “Yes, we do tax cuts – write that, thank you very much,” bellowed Mr Montebourg at a foreign correspondents meeting last week.

A few weeks after the Yahoo-DailyMotion kerfuffle, Adobe, the US tech company, announced it was to spend $600m buying Neolane, a 12-year-old French company that integrates on­line and offline marketing.

France has a strong record in tech start-ups, stretching back to the now defunct Minitel, a precursor of the internet. Xavier Niel, billionaire founder of broadband supplier Iliad, is the country’s best-known entrepreneur. Others include Marc Simoncini, founder of Meetic, a dating agency, and Daniel Marhely of Deezer, a music streaming rival of Spotify.

“The reality is, the French start-up scene has been 40 years in the making. People underestimate the weight of the ecosystem,” says Liam Boogar, of Rude Baguette, a blog on French start-ups. “As long as good French companies are being born, international people will want to buy them.”

Croissance Plus, a lobby group, has a long list of issues it says hinder creation of businesses, including high corporate tax­es, labour market rigidities, limited sources of finance, and administrative and judicial barriers.

But the eruption of Les Pigeons, with 70,000 online supporters, showed France has a vigorous start-up community. A recent survey of 125 young companies by France Digitale, which represents online entrepren­eurs, show­ed they achieved 40 per cent sales growth in 2012 over 2011, earning a third of revenues overseas and increasing employment by 25 per cent.

This month, a survey by Isai, an investment fund run by Jean-David Chamboredon, a leading Pigeon, showed a sharp rise in the value and number of early-stage investments in the first half of this year after a slump in late 2012. Although Isai says France lags well behind the US and UK in business angel funding, he confirms that there are plenty of state support schemes for start-ups.

Pretty Simple had potential ac­cess to state-backed incubator funds and interest-free loans from Oseo, which channels state funding for small businesses.

Pretty Simple ended up raising a total of €2.8m from a private gaming investor. But the company benefited from discounted rent in its municipally owned offices and took advantage of a special créateur d’entreprise status, which allowed the founders to claim unemployment benefit. “It’s a very good thing,” says Mr Raux. “You are able to work full time on creating a new company without spending too much on salaries. For 15 months we cost the company nothing.”

François Tison, of investment fund 360 Capital Partners, says France “has a pretty good ecosystem” with a strong base of tech skills, a “decent” financing infrastructure and good state incentives. His frustration is more over France’s negative image than actual impediments.

Addressing a meeting of investors and companies in Paris held by Bootcamp Ventures, he says: “Today, young kids are going to Barcelona, to London or Berlin. Other places have made people dream. That is something that Paris is missing.”