🇫🇷 The State of the French Tech Ecosystem 2023
Overlooked #166
Hi, it’s Alexandre from Eurazeo. I’m investing in seed & series A European vertical solutions (vSol) which are industry specific solutions aiming to become industry OS and combining dynamics from SaaS, marketplaces and fintechs. Overlooked is a weekly newsletter about venture capital and vSol. Today, I’m sharing the 2023 edition of my report on the French tech ecosystem.
I'm delighted to share my 2023 report on the French tech ecosystem with 120 slides covering everything: general metrics, tech trends, general market update, funds investing in France, angels, unicorns, exits and an outlook for 2024!
As a teaser for this article, I'll share 10 insights from the report, but you'll find many more interesting facts about the tech industry and the French tech ecosystem within the report itself.
The report reflects my views and do not necessarily reflect the views of my employer. If you have any feedback or if you spot any mistake in the report, please do send me an email at alexandre.dewez@gmail.com.
#1 - In 2023, the French venture ecosystem experienced its first contraction in its modern history. French startups raised only €6.8bn (41% YoY decline) across 632 funding rounds (17% YoY decline). Most of the decline in the amount raised can be attributed to a significant decline in mega-rounds (€50m+ rounds), which raised only €2.7bn compared with €6.9bn in 2022 (61% YoY decline). This decline in the amount raised is also consistent with what we saw at the global scale (40% YoY decline), in Europe (38% YoY decline) and in the US (39% YoY decline).
#2 - The top 15 rounds raised €2.5bn (36% of total). Most of the top funding rounds were in deep-tech projects, focusing on areas such as climate (Verkor, Ynsect, MyLight150), Generative AI (Mistral, Poolside), cryptocurrency (Ledger), and quantum computing (Pasqal).
#3 - AI (accounting for 15% of the total amount raised) and Climate (comprising 34% of the total amount raised) were the two investment themes with the greatest momentum. Besides them, startups raised on the following trends: quantum computing, temporary work, sustainable dyeing, defense, reverse mortgage for seniors, next. Gen. materials, modern data stack, digitising cities, accounting, SaaS security, digitising construction, energy renovation, space, compliance, modern insurance, mobile gaming, legal, modular construction, beverages home delivery, streamlining B2B commerce.
#4 - The competition to invest in France remains extremely high with several trends: (i) pan-European & selected US funds are doubling-down on France, (ii) historical French funds are fighting back deploying different strategies (e.g. extreme focus, collaborative approach, AUM play, becoming pan-European), (iii) new French funds are coming to the market with various investor profiles & investment strategies and (iv) there is a general uncertainty around the composition of the growth stage investing scene after the departure of cross-over investors (e.g. Tiger) and exotic investors (e.g. Softbank).
#5 - To understand the French venture market, you have to accept that there are two parallel market realities occurring simultaneously: (i) the ecosystem has never been as competitive in certain market segments as it is now, including seed (e.g. Pivot), AI deals (e.g. Mistral), climate deals (e.g. Verkor) and startups with exceptional growth velocity (e.g. Pigment, Pennylane), (ii) it has never been as challenging to raise capital for all other French startups (fewer funds investing, extreme difficultly to nail both growth & capital efficiency, incapacity to grow into its valuation, adverse macro-environment).
#6 - In 2023, the public market experienced a strong rebound (+22.9% for the S&P500) with tech growing at a faster pace than the overall market (+52.0% for the Nasdaq). However, this growth should be nuanced by 4 factors: (i) taking a long-term view, the Nasdaq only recovered in 2023 what it lost in 2022 (+3.1% over the past 24 months), (ii) excluding the “Magnificent 7”, the S&P 500's growth would have been just 6% in 2023 and (iii) 87% of software IPOs from 2021 are currently trading below their issuing price and (iv) SPACs have been a financial disaster with only 10 out of 310 SPACs generating positive returns.
#7 - In the private venture market, the correction is ongoing: (i) only 86 new unicorns were created in 2023 (vs. 340 in 2022 and 782 in 2021), (ii) 420k employees were laid-off (2x increase vs. 2022), (iii) the number of bankruptcies is increasing and no-one is too big to fail in venture, (iv) 1/5 of the funding rounds were down-rounds in 2023 (vs. 5% in Q1-22), (v) bridge rounds are becoming more common with 40% of Series A (vs. 29% average in the past 5y) and 36% of Series B (vs. 25% average) in the US being bridge rounds, (vi) 57% of VC-backed startups will have to raise in 2024 because they have less than 18 months of runway, (vii) there is a sharp decrease in both the amount raised and valuations at all stages with later rounds experiencing more severe market corrections.
#8 - The venture capital asset class is in the middle of a great reshuffle: (i) GPs are reducing their fund sizes (e.g. Insight, Lux, Founders Fund), (ii) VC funds are being acquired (e.g. GC acquiring La Famiglia, Lazard taking a stake in Elaia), (iii) VC funds are shutting down (e.g. Openview, Stride), and (iv) established GPs are retiring. Either you’re an excellent artisan or asset manager, or you’re at risk of dying out. It’s a phenomenon that will take time to play out because it takes almost a decade for a fund to fully close (you stop raising capital and making new deals but must exit the existing portfolio).
#9 - The French tech ecosystem is resilient with many large French tech startups based on solid fundamentals creating significant enterprise value.
#10 - Going forward, I don’t expect the French Tech ecosystem to experience further decline in 2024. It has found a new rhythm since Q2-22, having raised €1.5-2.0bn across c.150 transactions every quarter. More broadly, 2024 possesses several ingredients that could make it a great year for tech investing: (i) inflation is decreasing which should lead to decreasing interest rates and an overall soft-landing of the Western economy, (ii) with ChatGPT, AI has become mainstream and appears to be a strong candidate for the next major tech platform shift and (iii) corporate buyers, having gotten their expenses under control in 2023, are now considering purchasing new software to facilitate growth in 2024.
I’d like to thank everyone who contributed to the report both interviewees and sparring partners providing me with ideas and feedback. More specifically and as always thanks to Julia (🦒).