Venture capital: behind the unicorn race, the questions that arise

L’Usine Digitale: When you look at the list of French unicorns, a question arises. Where are the deep technologies? The government recognizes the problem, since just launched a new financing package for these companies.
Jean-Pierre Valensi:
It is true that it is a paradox, because we cannot say that France does not have basic research, much of it financed with public funds. The private finance ecosystem sees things differently. You have to have the resources to understand these technologies, and the maturity isn’t necessarily there yet, except in biotech.

Deep tech startups take very high technology and product risk, while venture capitalists have a preference for execution risk. However, the balance could be found in the future. In fact, fundraising in France is increasing. They raised over €4 billion in 2021 for technology, which is highly significant and reflects the trust their managers have earned. With these new resources and the supporting government plan, we can say that more attention will be paid to deep technology.

in your study on fundraising in 2021, shows that foreign investors contributed 66% of the capital in rounds of at least 100 million euros in 2021. Should we really be happy to see the birth of French unicorns that are no longer real if we stick to its shareholders? ?
We can be delighted that foreign funds, including American ones, are interested in French technology, it shows that our startups are innovative and disruptive, while having the ability to raise more and more funds. These fundraisers give companies greater valuation and commercial value, and the means to pursue their development, including through external growth.

We would like French funds to also have this ability to provide firepower. France still has work to do on targeting savings. There is a national problem of broader access to riskier products, the risk of which could be pooled through instruments such as mutual funds, possibly structured to offer a certain level of investment security, with perhaps also a small tax credit. You have to look at the reservoir of life insurance and employee savings, which drain billions. The funds of institutional investors, from which venture capital funds are financed, come very little from savings when they are invested in venture capital.

What are the prospects for external growth?

What is very positive is that by raising more, companies give themselves the means to accelerate their organic growth but also their external growth. The goals are to gain market share more quickly, acquire complementary service or technology bricks, or invest in new market segments. I think that mergers and acquisitions will accelerate, given the funds available. For example, while we might have expected banks to eat up fintech, in reality we see that they are raising significant amounts to ensure their own development.

Given the valuations of the unicorns, apart from the mergers and acquisitions precisely, is the European market capable of absorbing these upcoming IPOs?

We can be more optimistic today than yesterday. This year we have seen two IPOs on Euronext: Believe and OVHcloud, with significant amounts. For strategic consistency, some unicorns will have an interest in targeting an IPO in the United States. For others, Euronext is gradually expanding in Europe and has more capacity to attract investors. It is true that private equity valuations have risen a lot, while the stock market is more rational.

It certainly buys growth, but it is more demanding with profitability. For companies that have raised several hundred million euros, the challenge will be to show that their model can generate cash and reach regulatory profitability in a few years. It means striking a balance between continuing to drive growth and finding profitability in key markets.

When should we expect unicorn releases? What is the time when investors take the biggest tickets?

In general, the idea is to go as fast as possible, between two and five years. About fifteen Euronext IPOs in this horizon would be a very good target for Euronext. ESNs have known this moment. Keep in mind that unicorns won’t raise much more in IPOs than in private equity. People enter the stock market primarily to equip themselves with future resources, visibility and to ensure the independence of the company. And at this point, most of these scale-ups don’t want to sell. This is a significant paradigm shift in French entrepreneurship.

Why this obsession with unicorns? Is President Macron right to make the number of unicorns a national goal, in other words to focus on the valuation indicator? Does that make more sense than looking at billing figures, for example?

In absolute value, not necessarily. On the rise in valuation, yes, that makes sense. You have to see the dynamics. However, this dynamic can also be measured by the number of fundraising campaigns and project funding. And as such, we are on a very good path. The other point is that there is still a correlation with multiples, even though the latter have increased, and a correlation between fundraising and management’s ability to support the development of the business plan presented. If the companies had not made their business plan in terms of growth, they would not have been able to raise as much. What VCs are looking for is growth, technological development, market capture. This will then be broken down into billing.

Finally, the race for the unicorns is the race to capture the available liquidity, which continues to be just as abundant in the international market.

Yes, it is very important. In VC arbitrage, French Tech is more attractive than in the past. Between that and the ambitions of the French Tech bosses, who want to keep control, I am very optimistic for the sector.

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