(Part 1 in a series) No surprise, the US enjoys a clear advantage as the world's most fertile nation for startup creation. And the conventional wisdom on France is harsh: high taxes, low job flexibility, a general reluctance to embrace rapid change. But a startup needs to keep one eye on the here & now, and the other on the shape of things to come. The ten-year outlook on France's potential as a startup hotbed may surprise you.
First, let's state the obvious
If we just go by numbers, it's a grossly unjust comparison. Using the latest figures, the US GDP is six times that of France. You can even just take the combined GSP of California and Texas, and that figure is greater than the GDP of France.
Nor can we ignore France’s membership in the European Union. It enjoys the autonomy of a sovereign nation in many respects — education policy, infrastructure management, and plenty more — but as an EU member and especially as a key protagonist in the Euro, many economic and fiscal policy decisions France cannot make alone. On the other hand, startups in the Eurozone enjoy unfettered access to a large market with more uniform rules than the US. And the EU’s GDP, taken as a whole, exceeds that of the US.
These and other factors make a straight apples-to-apples comparison near impossible. Given the difficulty of objective comparison, and my plans for at least one sequel to this post, I am taking license to pursue a more anecdotal, subjective & personal approach. What follows then, I do not claim as a rigorous, scientific analysis. It is primarily a report on what my gut tells me, supported by relevant facts and data (and my 28 years’ experience in startups). There is a method(ology) to my madness, which I’ve documented in a separate post.
Access to Capital
A French entrepreneur friend of mine likes to say, “financing is fuel” — this is a rich and terrifically apt metaphor. The startup, of course, is the engine. Every startup wants to build a Formula 1 racer, while most of us just want something practical to get from A to B with good fuel economy.
Mario Cuomo once said “You campaign in poetry. You govern in prose.” (Interview in The New Republic, April 4, 1985) This principle also aptly describes the gap between a startup’s fundraising language and its operational language. As a result, in the US and France equally (and, to be honest, in startup ecosystems everywhere), startists and prospective investors often speak at cross-purposes.
Formula 1 vs. everyday car. Poetry vs. Prose. France and the US differ greatly, however, in the typical content of this misunderstanding.
The Venture Capital business was born in the US. Crowdfunding was born in the US. Most of the organizing principles of startups originated from the US. As a result, all aspects of the startup process, particularly fundraising, are more codified there. Most important, the expectations of investors are codified, in some cases, one might even say ossified. VC firms and startups engage in a “term-sheet dance” that feels a lot like a Hollywood-produced courtship Rom-Com. Even though the US VC industry is older, more competitive and more mature than in Europe (and France a fortiori), average investment hold times are much shorter at US firms. Many years after the 1999-2000 dotcom bubble, which did help reduce much of the irrational exuberance in investors’ expectations, the pressure remains strong to drive a startup to one of several well-rehearsed exit scenarios (acquisition, IPO, or subsequent late-phase funding round to leap into the midcap “big leagues”) within roughly 36 months.
Most US-based startists will tell you: it always feels like they’re asked to think about the exit too early. It’s not the exit date that’s necessarily too early: it’s the start-thinking-about-it date. Therein lies the crux of startist/investor misunderstanding in the US.
In France, the misunderstanding comes from a failure to see startups as different from other small business. Absent an appreciation of the meteoric growth curve at the heart of startup life, how can one distinguish between a viral mobile app and a bakery? This awkwardness is evaporating as an Internet-savvy generation is entering the economy; also, as newer VC firms, incubators and accelerators who “get it” have entered the fray. These newer firms are, importantly, more likely to make early-phase investments than the first generation of banker-mentality VC firms.
But even these new, hip players get tripped up by the French government’s misguided attempts to boost early-phase investment through tax policy. I won’t elaborate in this post, in part to spare you an angry rant on the many tragic consequences of these efforts, but here’s a handful of such misbegotten ideas:
- The tax credit on the Impôt sur la Fortune (ISF, basically a flat tax on assets that goes up to 1.5% for the über-rich) created an incentive for gullible rich folk to give angel investing a try;
- The Crédit Impôt Recherche (CIR, an R&D tax credit), with its arcane definition of what does or doesn’t constitute R&D spending, offers a declining tax credit over five years starting at 50% of R&D expenses in Year 1 — a credit best exploited by having the Cirque du Soleil do a number on your P&L and balance sheet;
- Oséo, in legal terms a private company but in effect an outsourcing of government assistance to small business, similar to the role played in the US by the Small Business Administration. The staggering number and complexity of Oséo’s programs, not to mention the draconian requirements to apply to any of them, require a full-time resource even in the smallest crew just to bring an application to an outcome (successful or not). So in that very narrow sense I suppose it is contributing to job creation.
Ooh did you notice the snippy tone in that last bullet point? I guess I better stop now.
Access to capital is undeniably better in the US — there’s more funding to go around, it’s available from a greater diversity of sources and in a greater diversity of funding packages. Angel financing, in particular, is more mature, more abundant, and more attractive for US-based angel investors than those in France. While there’s a lively debate in the US over the merits of offering tax credits for angel investments, there are in fact few such credits. Those that exist are state-level credits that aim primarily to make that state more attractive to startups. Such incentives aren’t really necessary since the maximum capital-gains tax rate in the US is 28%. A French business angel will be hit with a quasi-punitive 40.5% rate even on a relatively modest (250K €) gain. The French tax code offers a reasonable graduated discount for long hold times — if you sell your home after 30 years, you pay no capital-gains tax. But the discount exists only for residential property; there is no equivalent for business investments.
As a result, the French angel investor community is more cautious than the US one, and most significantly, less motivated by financial gain. This is actually great news for French startups. French angels are typically more involved, more interested in the startup’s specific mission and purpose, and more interested in the “startup adventure” than their American counterparts.
Crowdfunding appeared in the US first, is more broadly accepted, and is much better developed there than anywhere else. But France is in the Top Five worldwide, in terms of the number of available crowdfunding platforms, and in year-to-year growth (number of projects, number of investors, total funds raised). There is also a strong collective will, from the private sector and government alike, to give crowdfunding an unobstructed runway in France.
As the Eurostar monopoly ends on use of the Chunnel linking London to continental Europe, Deutsche Bahn will soon offer high-speed Berlin-London rail service for as little as 60€ one-way. Holland will likely come online soon after, pushing already cheap fares from all players further downward. This will make it all the easier for French startups to source Angel investment from other EU countries and even the UK, as the startists can reach them more easily, and angel investors can more easily drop in on their “adventure capital” investments. When personal involvement is part of the draw, Skype simply will not do.
These are oversimplifications but, to give you a takeaway summary:
US investors invest primarily in people. French investors care a bit more about the idea.
US investors focus on the destination. French investors care a bit more about the journey.
Bottom line: The US will remain a great place to raise capital, and France is not likely to catch up in the next ten years. But France will see big improvement in that period, particularly for early-phase financing, while US sources are likely to hold steady or slightly decline.
France has an edge overall in education, which is more consistent and more reliably high-quality for any given level of study than that found in the US. This advantage however becomes a slight liability when viewed from a startup perspective. It has a slowing effect on cross-disciplinary learning and a negative impact on what, for lack of a better phrase, I will call “cognitive diversity.”
A mantra often heard in software development (and the startup scene in general) is TIAMTOWTDI : There Is Always More Than One Way To Do It. From sixth grade through doctoral studies, French education leans strongly toward teaching a single “best by consensus” approach to students, not only in science but even in literature and the arts. So TIAMTOWTDI isn’t exactly what you’d call a “core value” students get from what and how they are taught in France.
The French penchant for the one-method-fits-all philosophy of education, compounded by the heavy hand of government in the oversight and regulation of the education system, leads to change coming in slow, excruciating increments. As a direct consequence, curricula often lag behind the edge of the art, with the macroeconomic side-effect that France tends to be a late adopter of new technology, despite being full of smart, well-educated people.
But change from outside the system has been brewing for quite some time, and that change has picked up speed recently. The seeds of change were sown as long ago as 1957 with the founding of INSEAD and the creation of its first business school in Fontainebleau.
One key player in the change is Marc Sellam, who in 1980 created a for-profit network of private universities that (in 2002) came to be known as the IONIS Education Group. This group enjoyed the kind of autonomy typical of US universities, particularly regarding:
- the market relevance and timeliness of what gets taught;
- fostering more osmosis between academic and business communities.
I’ve interviewed a few dozen graduates of IONIS schools, particularly those from Epitech, the engineering school that was the first to “get” startups, and I was delighted by how many of them, while still able to think in Cartesian terms, could think in other terms as well. I was also impressed by their mastery of “zero-day” technologies.
Epitech and other IONIS network schools, however, introduced in France a long-standing problem in US education: educational disparity as a direct result of income disparity. These new, more startup-hip schools cost money, thus threatening one of France’s undeniable advantages: from elementary school through the doctoral thesis, the cost (outside of private institutions) never exceeds nominal.
Enter Xavier Niel and his école 42 — named after (fellow geeks have already guessed) Douglas Adams’s proposed answer, in The Hitchhiker's Guide to the Galaxy, to the question of “Life, The Universe, and Everything.” Founded in March 2013, run by Nicolas Sadirac, founder of Epitech, tuition is entirely free for the 890 students who made it through the entrance gauntlet (70,000 had applied). Niel has bankrolled the entire school for the foreseeable future. The result: free, startup-centric learning in a private institution that’s not answerable to the Ministry of Education. Many in the French media see this as the shape of things to come.
The US flounders in K-12 and specifically late secondary education. Key problems include:
- Basic-skills proficiency (math, reading, comprehension) even among those granted high-school degrees;
- Substantial disparity in education quality and curriculum across the 50 states, as these are determined largely by the states individually, and the Department of Education is not empowered to direct education policy nationally to anywhere near the extent of its French counterpart;
- Compensation for teachers that is below average, both compared to other countries, and compared to people with similar levels of training employed in other professions.
Despite these hurdles, the US does well in nearly all measures of tertiary education. Unsurprisingly, it shines in the level of interaction between academia and business, particularly at the post-graduate level in fields of particular interest to business (chemistry, engineering and so on).
I don’t want to race ahead to the “Culture” section, but a key difference between the US and France is the depth and duration of respect for post-secondary educational accomplishments. In France, if you graduated from the Ecole Polytechnique, even 30 years ago, you’re golden. It doesn’t much matter what you’ve done since then. In the US, degrees from Harvard, Stanford and the like certainly garner respect, but all anyone really wants to know is what you accomplished last year, and do you think you can do it again next year?
American education evolves in a culture of encouragement: everyone is prodded on, regardless of ability. The core message is “keep trying,” French education is more normative, based on a culture of criticism. The core message is “don’t make a mistake.”
The US has been quicker to embrace educational alternatives — with 50 states each setting their own policies, and so many private institutions doing whatever they can to stay competitive, examples abound that others can emulate or avoid depending on their outcomes. France has fewer such “laboratories.” But for better or worse, education in the US remains more heavily influenced by market imperatives than in France, so the future of US education will be shaped by forces not always focused on learning.
Bottom line: We will likely see measurable improvement in education in both countries in the coming years. The US system provides the more startup-y education… for now. But expect France to adapt and improve more, and faster, than the US, over the next ten years.
The US has a tremendous advantage over France in the availability, mobility, flexibility and above all, the expectations of its workforce. This across-the-board advantage is even more pronounced when looking only at startup ecosystems. While conditions in France will likely improve in coming years, don’t expect them to become better than those in the US any time soon.
There is no such thing as job security. Working for IBM or Total for 25 years… a few people still do that I suppose. But that is neither the experience nor the ambition of anyone entering the job market today.
Owing in large part to the massive expansion of jobs in service (including finance) and information-based activities, a large and growing number of jobs in the US are based on at-will employment. This means the employment contract contains a clause with language like this:
Legally, the validity of this clause varies from state to state, and wrongful-termination lawsuits are occasionally won by dismissed employees despite the presence of this clause. But in the overwhelming majority of cases, termination of at-will employment is unchallenged, because the principle is universally accepted and part of American culture.
This attitude stands in stark contrast to French attitudes and legal frameworks for employment. There is no widely-available US equivalent to the CDI, Contrat à Durée Indéterminée (Indeterminate Duration Contract) that covers 75% of the employed workforce in France. Even the CDD, Contrat à Durée Déterminée (Limited Duration Contract), often used by management to improve its workforce-scaling options, includes considerably greater protections than anything comparable in the US. Firing someone in France, even under the lesser protections of the CDD, even for gross incompetence (which the French euphemistically call “insuffisance professionelle”), involves considerable legal hurdles, with the burden of proof resting almost entirely on the employer.
Let me state it plainly: the prevailing framework for employment in the US goes too far in protecting the employer, and the French one goes too far in protecting the employee. Both are sufficiently distant from any reasonable definition of fairness to make John Rawls cry.
These imbalances create (or at least exacerbate) a strange workforce contrast. In France, the primary employment hurdle is getting in. Since it’s difficult to let people go, employers are much more circumspect about new hires. In the US, while it’s comparably easier to get hired, the challenge is staying in. As a result, a large swath of the American workforce already has “startup mentality” — they know continued employment depends, among other things, on their contribution to the enterprise.
Workforce mobility is another big difference. US businesses spent $25 billion on employee relocation in 2012 alone. The trend is slightly downward since the real-estate crash of 2007-2008, as homeowners are more likely to turn down relocation offers when they have to sell their existing home at a loss. But mobility for all purposes is more widespread in the US.
Take air travel, for instance, just one of many such indicators. According to the World Bank, France carried 60.16 million air passengers (domestic and international combined) in 2012. This is roughly 0.94 passengers carried per person living in France. The 2012 US figure is 730.8 million, or 2.33 passengers carried per person. Combine this with an earlier and more widespread adoption in the US of all the alternatives — telecommuting, work-at-home, Internet (particularly Skype and collaborative solutions such as Webex) and you get a workforce that is more ready to work wherever the work is, from wherever they happen to be. This kind of flexibility is taken for granted in the startup world, and the US simply has more of it.
Bottom line: France’s workforce problems are long-standing, politically-charged, and run deep. Expect modest improvement in this area over the next ten years, but it will not catch up to the workforce flexibility of the US, even while the latter’s situation is in decline.
Next week: Legal, Culture, Markets... and the thrilling conclusion!
Continue reading the rest of the analysis, and of course, the surprise ending & the TL;DR summary.