France and Germany in search of venture capital

Alain-Patrick Umucyo By Alain-Patrick Umucyo, 28th Mar 2015 | Follow this author | RSS Feed | Short URL http://nut.bz/3pjia3bh/
Posted in Wikinut>Business>Investment

France and Germany employed public funding to encourage innovation in their respective jurisdiction. Their example reveals two different methods of inciting private financing. It is a starter to understand the choice faced by any sovereign State wanting to stimulate entrepreneurial innovation. The German approach and the French approach remain perfectible nevertheless.

1 The common objective : the revival of the economy

1.1 The current stagnation as a signal for the revival

The Annual report on the state of France in 2014 opens with an emphasis on the economic hardships of the country. Published in December 2014 by the Economic,Social and Environmental Council, this report starts with an observation : “France is suffering from an economic model too dependent on the financial markets which imperils the future.”(1) The following notes highlight the questionable efficiency of the austerity measures and concede that “the stagnation of the activity and the receding employment rate stress the difficulties encountered by businesses and more broadly by the people.”(2)

The main reason for the receding employment rate at a moment where economies regain growth has been heavily discussed for about two years. The consensus indicates that the integration of new technologies into the world economic system tends to render some jobs obsolete. Now employment favours individuals with specialised competencies and most of all able to adapt to rapid changes induced by innovative technologies.

In July 2014, the magazine Foreign Affairs offered an edifying analysis of the current mutation of the economies.(3) The main observation is that “in the future, ideas will be the real scarce inputs -- scarcer than both labor and capital.”(4) The future starts now.

1.2 The revival without the State money

The high level of unemployment and precarious activities in the European Union confirm the analysis from Foreign Affairs. In this context, the objective is to sustain the production of ideas and their integration into the mercantile circuit so as “to generate economic value and jobs”(5). However, the irresistible grasp of the finance world on the member States of the Union(6) prevents the latter from mobilising enough capital to sustain innovation efficiently. Private capital has become necessary

2 The privileged choices : the individual investor or the investment companies

France and Germany have dropped little public funding to encourage innovation in their jurisdiction. Their example reveals two different approaches to incite the deployment of private capital. It gives insight into what kind of choices are under consideration for any State wishing to support entrepreneurial innovation. Nevertheless, the German and the French approaches remain subject to criticisms.

2.1 Germany for the individual investors

In Germany, “are supported private investors (natural persons), who acquire stakes from young innovative enterprises. With the federal State financial aid, the private investor is reimbursed 20 % of the price of the acquisition”.(7) Two operational conditions need to be highlighted :
1. “The participation to the capital last for at least 3 years”(8) ;
2. “The investor has to put at least 10 000 € at the disposal of the enterprise. If the payment is divided so as to be dependent upon the reaching of milestones by the enterprise, each part of the payment has to amount to at least 10 000 €.”(9)

On 14 February 2015, the Facebook page of the German magazine Gründerszene shared an article(10) noting that “only few have taken up the offer of the federal State until now.”(11) Among the critical comments, one remarked that “nobody has had the idea of putting this money directly into the startups !”(12)

The goal for the State is indeed to limit the public investment in newly established businesses, with little to no revenue and thus risky in terms of return on investment. Private persons have to take the necessary risks for preparing the future.

The approach of the French State is very similar in that it consists in limiting the exposure of public finances. Notwithstanding, the method is different.

2.2 France in favour of the investment companies

2.2.1 The admitted limitation of the public investment

In the framework of the program of investments for the future, officially launched by the “law on amended budget for 2010”(13), the French State created “the French Tech initiative as a great movement of collective mobilisation.”(14) The heart of this initiative is endowed with 215 millions euros,(15) which is around 0,6 % of the 35 billion euros of the program of investments for the future. There again, the goal is clearly to limit public expenditure.

Out of the 215 millions euros, 200 millions are aimed at co-financing “private startups accelerators.”(16) The call for interest published to promote this undertaking emphasis what the German commentator remarked for Germany : “In any case, the French Tech Accélération Fund is not aimed at directly investing in the accelerated startups.”(17)

2.2.2 The covered advantage given to the investment companies

About the “structures that are eligible for the French Tech Accélération Fund”, the call for interest introduces a feeble distinction between “incorporated private accelerators” and “investments funds which integrate in their strategy an important service for 'accelerating' startups, for instance by partnering with incorporated accelerators”.(18) Details indicate that investment companies are privileged. This is clear with respect to the “investments funds” structures.

Regarding the incorporated private accelerators, “the French Tech Accélération Fund (…) invests in priority tickets starting at 1 million euros (…) the French Tech Accélération Fund invests with private co-investors (institutional, corporate, natural persons …) and in the same conditions (…). The public incentive shall not go over 50% of the financing round.”(19) This means that to benefit from the public incentive, the owners of accelerators will not be able to only submit an application. They will have to mobilise private investors able to engage at least 1 million euros. Such an investment suggests that private legal persons will be solicited. This is even more probable when this million is put in perspective with regard to the 10 000 euros required by the German federal State to support natural persons wanting to invest in young innovative enterprises.

The present article is extracted from the newsletter -The Series- of 16 February 2015.

SOURCES

(1)FAUVEL Hélène. Rapport annuel sur l’état de la France en 2014 . December 2014. Le Cese. p. 11 <http://www.lecese.fr/sites/default/files/pdf/Rapports/2014/2014_27_rapport_etat_france.pdf> accessed 15 February 2015

(2)Ibidem

(3)BRYNJOLFSSON Erik, MCAFEE Andrew, SPENCE Michael. New World Order : Labor, Capital, and Ideas in the Power Law Economy . July 2014. Foreign Affairs. <http://www.foreignaffairs.com/articles/141531/erik-brynjolfsson-andrew-mcafee-and-michael-spence/new-world-order?cid=emc-feb15promoc-content-012115&sp_mid=47856027&sp_rid=YWxhaW5wYXRyaWNrQG1lLmNvbQS2> accessed 15 February 2015

(4)Ibidem

(5)LA FRENCH TECH. Appel à manifestation d’intérêts pour les investissements dans des structures d’accélération de la croissance de startups innovantes (« accélérateurs de startups ») . Gouvernement.fr. <http://www.gouvernement.fr/sites/default/files/contenu/piece-jointe/2015/01/ami_french_tech_acceleration_0.pdf> accessed 15 February 2015

(6)UMUCYO Alain-Patrick. II/ Lobbyists, operators in troubled territories. 1/2 : The three pathways of lobbying. . 31 October 2014. Wikinut. <http://www.wikinut.com/in/xgdhii/business.wikinut.com/II-Lobbyists%2C-operators-in-troubled-territories.-1-2-%3A-The-three-pathways-of-lobbying./d4uosee5/> accessed 20 February 2015

(7)BUNDESAMT FÜR WIRTSCHAFT UND AUSFUHRKONTROLLE. INVEST – Zuschuss für Wagniskapital . Bafa. <http://www.bafa.de/bafa/de/wirtschaftsfoerderung/invest/> accessed 20 February 2015

(8)Ibidem

(9)Ibidem

(10)GRÜNDERSZENE. Relativ zurückhaltend bisher, die Szene... . 14 February 2015. Facebook. <https://www.facebook.com/Gruenderszene/posts/10152612147970966> accessed 16 February 2015

(11)HAHN Christopher. „INVEST-Zuschuss“137 Millionen Euro vom Staat warten immer noch auf Investoren und Gründer . 10 February 2015. Gründerszene. <http://www.gruenderszene.de/allgemein/invest-zuschuss-fuer-wagniskapital-137-millionen-euro-warten> accessed 20 February 2015

(12)AXINIO.COM. Bei den Voraussetzungen ist es auch kein Wunder! … . 14 February 2015. Facebook. Comment. <https://www.facebook.com/Gruenderszene/posts/10152612147970966> accessed 20 February 2015

(13)BPIFRANCE. Investissements d'avenir – Programme . BpiFrance. <http://investissementsdavenir.bpifrance.fr/> accessed 16 February 2015

(14)LA FRENCH TECH. Appel à manifestation d’intérêts pour les investissements dans des structures d’accélération de la croissance de startups innovantes (« accélérateurs de startups ») . Gouvernement.fr. <http://www.gouvernement.fr/sites/default/files/contenu/piece-jointe/2015/01/ami_french_tech_acceleration_0.pdf> accessed 15 February 2015

(15)Ibidem

(16)Ibidem

(17)Ibidem

(18)Ibidem

(19)Ibidem

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Comments

author avatar Nancy Czerwinski
28th Mar 2015 (#)

Thanks for sharing your article. Smiles to you!

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