The French Connection
It's conventional wisdom that Europeans can't start companies and pose no threat to America's entrepreneurial dominance -- there's too little venture capital, too much respect for authority, no culture of risk. But now all that is changing. Especially in France
It is a seductive thought, this idea that the United States is the sole seat of entrepreneurship, that the entrepreneur and the venture capitalist are cultural heroes as uniquely American as the cowboy. Start a company with a lot of energy and a little capital in any other country, and the venture just won't fly. No other economy can accommodate entrepreneurship. No other culture will tolerate it. Yet in 1989, for the first time ever, more venture capital was invested in Europe than in the United States. That gap will continue to widen as the single European market, with 355 million people, becomes the world's largest, in 1992. Despite painful adjustments after 40 years of communism, investment capital will inevitably flow into Eastern Europe in the wake of the Berlin Wall's fall, an event that one French entrepreneur, Pierre Kreutz, dubs "as significant for Europe as the opening of the West was for America."
Peter Brooke, the chairman and CEO of Advent International Corp., a Boston-based venture-capital firm, is probably the savviest U.S. investor in European start-up and developing companies. He has been making such investments for 20 years. "A lot of people have commented that entrepreneurship in this country will always be a step ahead of everyone else. That is absolutely nutty," says Brooke. He argues that history has unduly favored the United States: for one thing, the United States has developed a large, homogeneous market "for entrepreneurs to practice on"; for another, two wars in the space of a generation reduced the European industrial base to rubble, giving the States an edge.
In 1983 membership in the European Venture Capital Association numbered 6 firms. Today the figure is 270. In 1987 Advent International closed a venture fund containing $220 million to be invested internationally. Two years later Advent closed another fund. That one had raised $230 million. Advent's portfolio contains many young companies already doing business throughout Europe, if not globally, even though their annual sales are often less than $10 million.
Behind those developments lie big questions. Can Europe, with its long-standing traditions, create a true culture of risk? Can the European welfare states withstand the fallout of chaos and failure that comes with entrepreneurial initiative? Is the United States at risk of being outinnovated by other countries around the globe, of being outbid for scarce capital in the years ahead?
"Europe is very confident about its destiny," says Advent International partner John Begg. And right now, he adds, despite a recession, the confidence is most palpable in France, where last year venture-capital investments exceeded West Germany's by 50%. Britain's economy remains weak and isolationist. Germany's is burdened by the cost of reunification and menaced by its proximity to the turmoil unfolding in the East. That gives France a window of opportunity, a chance to shuck its stodgy, socialist past and embrace an entrepreneur-driven future.
In the past 10 years only two countries -- the United States and the United Kingdom -- have had more venture capital invested in them than France has. Currently, in France roughly $3.2 billion of venture money has been invested, and another $2 billion is available for investment. According to the European Venture Capital Association, the amount of venture capital available for investment in France rose by 60% between 1988 and 1989, while new funds raised soared by 152% in the same period. That compares with an average increase for all Western Europe of 33% and 67%, respectively. Even though those numbers trailed off in 1990 because of recession and the Gulf War, new funds totaling $1.46 billion were committed to French venture-capital firms last year.
Those numbers don't surprise Advent's Peter Brooke. He claims the French are culturally predisposed to starting companies. "The French nation historically has been one of small shopkeepers. They are much more suited to this than you'd think." Moreover, Latin cultures like France and Italy encourage creativity. They have evolved "cultures of disobedience," as Brooke puts it. "There's a willingness to challenge the system."* * *
Bertrand de Tournemire is 51 and has now embarked on his third commercial venture. "To start a company in France, two things are necessary," he says. "You have to be crazy and you have to be creative." Dapperly dressed in an ascot and a houndstooth coat, de Tournemire -- whose previous pursuits ranged from drilling for oil in Africa to growing grapes in Provence -- exudes a little of each of those qualities.
Five years ago he and his wife, MichÈle, moved north to Angers, a small city in the Loire Valley. There they started Missile, a manufacturer of high-quality shoulder bags, purses, and luggage. The idea sprang from the daily chore of sending their five children off to school while avoiding the headache of having things get mixed up. Missile's bags are modular: interchangeable compartments can be attached to the body of the bag with Velcro. The company, with sales of just $1.5 million, is already doing 40% of its business outside France. In a country where formality and procedure have been refined to an art, the de Tournemires moved boldly. When they knew they had the right look for their bags, they headed for the salons and department stores of Paris to win acceptance for their creations. Last year the de Tournemires took a trip to Los Angeles and New York City, where they knocked on the doors of boutiques in a grass-roots search for a U.S. importer.
"The French make excellent products, but there is not a sense here of creating the market or adapting to the foreign market," says Bertrand de Tournemire. One of Missile's major markets is Japan. Looking at one line of Missile bags, its clean design and simple touches of white-and-red buttons evoking the Japanese flag, you get the sense that de Tournemire has done his best to redress that shortcoming. A small French Tricolor is sewn onto each bag, designating its country of manufacture. "That's very important to the Japanese. They like French things."* * *
Tropical Green, like Missile, is a start-up company that has found a niche where none seemed to exist. Ornamental horticulture is an industry as huge as it is homogeneous. Worldwide sales are $20 billion a year. And yet, in France, just 11 common varieties of flowering plants make up 80% of the market. (In the United States, only 8 varieties account for that 80%.) Enter three men with an idea, botanist Jean-Marc Chaintron and his two partners, RÉmi Gaston-Dreyfus and Alain Dubos. What if they developed a specialty plant, patented the development process, trademarked the name, and promoted the plant as something much more distinctive than your average, garden-variety azalea? Couldn't they perhaps garner a tiny slice of that big and boring market?
The result was the Tamaya, five years in the breeding on a farm in the Ivory Coast. The Tamaya looks like a small tree and flowers year-round. Its shape, based on feedback from focus groups, is the most subliminally pleasing possible. The name has pre-Columbian roots: it is one of 50,000 words created by a computer from three- and four-syllable combinations derived from South American Indian languages. The 10 most pronounceable were read to a focus group, which chose Tamaya.
Tropical Green sits in the countryside west of Paris, in the village of GaranciÈres, in a simple, one-story building with a greenhouse out back. "We are selling life. We thought it was crazy not to sell life when you sell a plant," says RÉmi Gaston-Dreyfus, launching into a lecture on the wholesale market in Amsterdam, where a million plants are sold daily with dispatch. That market, he argues, ignores the warm feelings people have for plants. Why couldn't that positive notion be used to market the Tamaya?
Tropical Green, with 1990 sales of $3 million, has thus far raised $10 million in venture capital and hopes to raise another $6 million. This year it expects to sell around 1.2 million plants in five European countries, achieving sales of $10 million. That is break-even. In 1992 Tropical Green expects to sell 3.5 million plants. The company has just started growing seedlings in Costa Rica, for export to the United States and Canada by 1994. For a quirky company like this one, capital did not come easily. "It was so strange," says Alain Dubos, Tropical Green's president. "Three times I went to banks and they said no, but the individual bankers said, 'I'll come along with you.' They believed in what we were doing."
Tropical Green didn't warp its strategy to attract money. "We planned no quantitative market studies. A lot of venture capitalists couldn't accept that," says Dubos. "We just had the concept. No price, no shape." The idea was simple -- create a plant with brand-name identity. Eventually, Tropical Green landed 12 private investors. Institutional investors then followed. France's largest insurance company has invested $4 million, for a 10% stake. Equally remarkable is the willingness of men like Gaston-Dreyfus and Dubos even to start a company. Dubos had been an executive at a large brewery, where he oversaw 2,000 employees. Gaston-Dreyfus, now 35, had started a law firm in 1979 and built it up to 20 lawyers in five years. (The largest law firm in France has only 80 lawyers.) His elegant apartment overlooks a park in the Parisian equivalent of New York City's upper East Side. The modern art on the walls and the Oriental rugs underfoot affirm his comfortable station in life. "People thought I was crazy to go from being a lawyer to a grower," he recalls. "But this is an opportunity to create something."* * *
The French phrase for venture capital is literally translated as "risk capital," but that is a bit of a stretch. It would be more accurate for the French to call it "development capital," since investment flows more to developing companies than to start-ups. In 1990 members of the Association FranÇaise des Investisseurs en Capital Risque (AFIC), an organization comprising France's 80 leading venture firms, invested some $500 million in 618 small French companies. But of 1,019 deals, only 26% involved start-ups, and they accounted for just 10% of the total amount invested. French investors are shunning start-ups, says Gilles Copin, a professor of finance at Lyon Graduate School of Business.
That mirrors trends in the United States, where in the past eight years many venture capitalists, beset by failures and low returns, have shied away from funding innovative and risky start-ups. A few investors, armed with insufficient capital and offering a patchwork of help, have ventured into that void in France. Banks remain cautious, and government support for research, though ample, often doesn't create successful companies. Some entrepreneurs have become business angels, but they usually do small regional deals. Says Copin: "We have not solved the problem of the start-ups. There is still a big hole there."* * *
The most daring feature of the offices at the venture-capital firm of Alpha AssociÉs, in Paris, are the Andy Warhol Campbell's soup-can prints hanging in the company's elegant lobby. At the top of a broad spiral staircase in a high-ceiling office sits a youthful-looking, self-assured man, Dominique Peninon, a partner at Alpha, who explains the firm's mission this way: "We are not looking for start-ups. Our philosophy is to take less risk and get a satisfactory return on each company in the portfolio." Peninon says the name of the game in European finance these days is acquisition. "If you don't acquire, you will be acquired in the next five years."
Since 1985 Alpha has launched five funds totaling $100 million, for the purpose of acquiring existing European companies, mainly in France. Alpha targets small companies that dominate niche markets. Often those companies are less than 10 years old. Many are first-generation companies with an aging founder. Alpha's strategy is to buy in, hold, and exit by selling to other investors. Since January 1990 Alpha has exited 11 such investments in that way. "Right now the valuation these developing companies can get from corporations is much higher than what they can get from the stock market," says Peninon. He notes that the initial-public-offering market in France has plummeted from 150 new issues in 1987 to fewer than 20 in 1990, and has yet to recover. Dynamic companies are hot because of the coming market unification. Buyers believe companies that thrived in one country, or even one region, can now prosper beyond national borders. All they need is more capital and marketing muscle.
"The mentality has changed," says Peninon. "Company owners are more open-minded to selling. The idea of having an external partner not linked to the family was hard to sell five years ago. It gets easier every day. Owners see it's constructive to have an outsider with a different point of view." Peninon has just one start-up in his portfolio, but that label is a misnomer. "Euronature," he says, "is a real contradiction." It is also the quintessence of what Peninon preaches.
Euronature, founded two years ago, has its offices in a simple turn-of-the-century stone house on a quiet street in the Paris suburb of Chatou. The company's founder is Pierre Kreutz, age 47, a big-company man in the process of being reborn. He worked 17 years for Kraft Foods, spending 5 of those years in the United States; he then worked another 7 years for the largest cheese company in France. Kreutz, seated at a long table in a spare downstairs room that overlooks the backyard, is a thin, dapper man who speaks with a sense of confidence. By 1989 he had earned enough credibility to raise $60 million from investors in France, Europe, and the United States.
He then began buying majority positions in food companies in four basic categories: fish, health foods, foie gras, and luxury regional foods. Since June 1989, Euronature has bought into 30 food companies, many of them serving regional markets in France, with total annual sales of $300 million. His strategy is to leave management intact, while putting capital and marketing expertise into the regional companies so they can sell throughout Europe. Kreutz notes that there are 23,000 corporations in France, but the number-1,000 corporation on the list, ranked by revenues, has sales of less than $10 million. "There's a large range of these small companies, and they are extremely difficult to penetrate," he says. "Some of these companies are brilliant. They are family businesses, and they are very regional. They don't like bankers, and they rely heavily on local advice." Kreutz tapped into that network by approaching local lawyers, accountants, insurance brokers, and tax advisers. "A lot of these companies were concerned with the overall picture of 1992," he says. "They knew they needed to build up their sales forces. They are usually one-generation companies started after the war," he continues. "The owner is in his sixties, and his children are not interested or do not have the necessary resources to be entrepreneurs. Inheritance taxes are also quite healthy. For all of these reasons, these owners were mentally open to some kind of deal."
Euronature became the majority owner, but in each case it wanted management to stay on for at least five years. In fact, some of the earn-outs it has structured run until 2007. Compensation for each manager will hinge on the performance of the division, not the whole company. Kreutz has struck a similarly long-range deal with his 20 original investors in Euronature, who last year put another $20 million in equity into the company. "For five years they are locked in," he says. No one can sell. "Then in 1996, if any one of my shareholders wants me to list the shares on a major exchange, I'm obligated to do that." Kreutz's belief is simple: There is no reason you can't sell, say, pÂtÉ in Germany or herring in Italy. He has Euronature's ascent neatly mapped out in his head. In 1992 he foresees raising Euronature's equity from $80 million to $300 million. "Then we will buy a major European food group for between $1 billion and $1.5 billion," he says with a perfectly straight face. "If we are not one of the five largest food groups in Europe by the year 2000, then I will have failed."* * *
On the surface, France looks like a great place not to invest. Nearly 45% of gross domestic product goes to the tax man. That compares with 37.6% in Germany and 30.2% in Japan. For every 100 francs an employer pays a worker, another 60 francs is paid by the employee and his employer to the government to fund social security and other benefits. Yet, notes Gilles Copin of Lyon Graduate School of Business, "from a fiscal standpoint, France is now the third-best country in the world to invest in, behind the United States and England."
France's surge in free-market vigor has been engineered, ironically, by a socialist government in power since 1981. Large companies have been denationalized. For small-company founders whose initial stake was less than 25% of total shares, tax on capital gains has been eliminated at cash-out. Corporate taxes have declined from 50% to 37% -- provided earnings are reinvested in the company.
Cultural change has accompanied fiscal reform. "Ten years ago the entrepreneur was considered nouveau riche in France. He was rubbish," says Copin. "Now he is a hero. It is OK to be rich." The stigma historically attached to wealth is writ large in a common French saying: "To live well you must live hidden." Robert LattÈs, one of France's most eminent venture capitalists, refers to the "American contagion" in pinpointing why France has become a hotbed of company creation. Young, talented managers now routinely spend time in the United States. They realize they don't want to return to France and work for the national phone company. Top personal income-tax rates, meanwhile, are so high that the only way an executive can amass wealth is by creating equity.
"In France the only way to get rich is to start a company," says Alpha AssociÉs' Dominique Peninon. In France new companies create about 600,000 jobs a year -- half the new jobs created overall each year. That figure illustrates a trend that, as in the United States, has unfolded since the hard economic times of the mid-1970s. Between 1975 and 1982, 1 million jobs disappeared from French companies with more than 500 employees, while in the same period 1 million jobs were created by companies with fewer than 20 people.
It was in 1974 that economic crisis struck France. The oil shock and inflation hit the aging, centralized corporate structures hard. "It took five years for people to react and another five years for people to decide what to do," recalls Bruno Dufour, president of Lyon Graduate School of Business. The school is the most active in France in teaching entrepreneurship. "We have a specific program for start-ups and an endowed chair for teaching about start-ups," he says. Each year the school turns out 25 new start-up managers, and in the past three years faculty at the school have started 17 new companies. Dufour believes that power will shift to more commercially oriented cities like Lyon as the economy continues to decentralize and French companies go increasingly pan-European.
Cross-border alliances linking ideas with money are becoming more prevalent throughout Europe. According to the European Venture Capital Association, transnational investments by its members more than doubled, from 323.1 million to 837 million ecus, between 1989 and 1990. (An ecu, roughly equal to a dollar, is the proposed common European currency.) That dynamic is reflected in the relationship between 3i, Britain's largest venture firm, and SCV Audio, a small French manufacturer, distributor, and installer of professional audio equipment, based near Paris in the suburb of Roissy. For four years running, SCV appeared on a list of the fastest-growing small companies in France, as tracked by a business monthly, L'Entreprise magazine.
Richard Garrido, an SCV founder and the company's marketing manager, recalls how that recognition elicited a cool response from customers. "Only about three picked up the phone and told us how great it was to be working with such a successful company. We heard indirectly that about 50 of our customers were unhappy. They said, 'Look how much they're making. Why don't they lower their prices to us?' They have no clue what profit is all about. In France making money is still taboo." But SCV's profit, while turning off some customers, was also attracting smart money. "The phone started ringing off the hook." The most ardent caller was 3i, which has arranged more than one-third of the 1,000 management-led buyouts that have occurred in the United Kingdom over the past decade. 3i told SCV that it could help recapitalize the business and offer strategic advice. Recalls Garrido, "They told us we had a Formula One car, and that they could turbocharge it." 3i advised SCV to acquire competitors in Belgium and Spain. Garrido was incredulous. "We had just bought a company in Holland," he says. To SCV Audio, which started life in 1978 with three guys kicking in $1,000 each and has now grown to a $20-million company with 18.5% market share in France, that acquisition seemed ambitious enough for the time being.
Not so, rejoined 3i. "You have to have critical mass because of the single European market," says Garrido. He notes that today SCV may have 18.5% of the French market, but come 1992 it will suddenly have only 4.5% of the European market -- unless it makes some acquisitions. He adds, "The way to reach critical mass is not to say, 'I'm going to sell in different countries,' but to use the existing tools in those countries -- make acquisitions." Despite the coming of the single market, says Garrido, "the cultures, customs, and languages are very different in Europe."
SCV has since made acquisitions in Belgium and France. It is working on a deal in Spain. In the course of acquiring, SCV has received three buyout offers itself. Swallow or be swallowed. SCV is not alone in its search for critical mass.* * *
While the big money scours the landscape for the Formula Ones that will dominate Europe in years to come, grass-roots start-up companies still struggle. Yet a new phenomenon is arising in the provinces: entrepreneurs who have built companies are now turning around to finance new ones. One of the more barren regions in France for new companies is in the north by the Belgian border, around Lille, population 171,000. Here, the old-line industries of textiles, steel, chemicals, and coal have been in retreat for a generation.
But Lille is also home to the Mulliez family, its wealth somewhat hidden, its instincts entrepreneurial. The family is a founding member of the Club des Gagnants (The Winners Club), a group of about 150 entrepreneurs in the Lille region, formed to raise the visibility of entrepreneurship. The Mulliez money sprang from the textile trade, but when that business faded in the 1960s, the family moved into distribution and services. It runs the second-largest superstore chain in France, which the family started from scratch nearly 30 years ago.
In 1986 the family started La Fondation Nord Entreprendre to help start-ups in the northern regions of France. The chairman of the foundation is AndrÉ Mulliez, 62. The foundation makes grants, which are repaid if the new company takes off. If not, the debt is forgiven. The grants are not investments. "We are nonprofit venture capitalists," says the foundation's director, Marc Saint Olive. "We lend money, we don't give it away. Otherwise there is no respect in the relationship. We always lend to the man -- to the creator, not to the company."
Since its inception, the foundation has lent $3.4 million to 74 entrepreneurs. All entrepreneurs who receive funding from the foundation must lend their expertise in assessing future start-up proposals and offering advice to other founders Nord Entreprendre supports. The foundation never fully bankrolls start-ups. Its grants average around $50,000, and none exceed $70,000. They are meant to goad the entrepreneur and to confer legitimacy in the eyes of dubious outsiders, such as banks and other investors. Among the 74 companies that Nord Entreprendre has helped fund since 1986, 18 have repaid fully or in part. Sixteen have failed. The rest fall somewhere in between.
The foundation now receives about 300 inquiries a year and ends up funding about 20 companies. It has heard from three other families in France that want to set up similar foundations. Once every six weeks the Mulliez family meets to decide on the latest proposals. One night at 7:30 p.m., a dozen people sit around two rectangular tables pushed into the center of a large, open room. Saint Olive and assistant director Bruno Motte present the three proposals the committee will consider. (It has already met four or five times with each candidate.) A discussion ensues before each candidate is called into the meeting to defend his idea before the committee. The questions are direct, the ideas not revolutionary. One entrepreneur wants to make underground storage tanks for small factories. Two men have a software company that writes CAD/CAM programs for the garment industry. A third offers document storage for offices choking on paper and exorbitant rents in the Paris area. By the time the third applicant leaves the room, it is almost 10:30. The committee adjourns to an adjacent table to decide -- over dinner. The first course is a cold plate of smoked salmon, caviar, and pÂtÉ. Communal loaves of bread and a bowl of salad make the rounds. Cheese and fruit follow, along with bottles of wine and mineral water.
As the gastronomic event unfolds so, too, does the decision-making process. Each committee member must vote, explaining his decision in two sentences or less. If one person says no and 11 say yes, the lone dissenter must follow the project until his doubts have been resolved. Two no votes kill a proposal. Tonight the committee decides to award the applicant with the underground tanks $30,000, and the man with the storage boxes $60,000. That is how the foundation shells out about $750,000 a year. The bias is toward action. People have been willing to play a hunch.* * *
While the economy in France has slowed of late, investors like Alpha AssociÉs' Dominique Peninon continue to invest in growing French companies. And yet Peninon worries. He notes that with France's sharply progressive tax, less than 10% of the population pays income taxes of any consequence, while 60% benefits meaningfully from government largess. For France to be more competitive after 1992, taxes and government spending will have to come down -- in the face of a recession. And yet a clear majority has a vested interest in the status quo. What will happen? John Begg of Advent International acknowledges a related quandary he has had concerning investing in France. "Sometimes things go a little slower than we would like," he says. "In the States I could come into a company and say, 'OK, guys, let's tighten our belts. Let's cut the deadwood.' I can't easily do that in France. The safety net is so strong." When push comes to shove, how committed will the French be in favoring the free market over the welfare state?
Perhaps the answers to such riddles lie in unlikely places such as Brittany, one of the most rural and traditional provinces in France. Agriculture remains the mainstay there, where just a generation ago, only half the houses had electricity and plumbing. Today, though, with its stable and industrious work force, Brittany has become home to 1,500 different food and agriculture-related-products companies. Canon has a research-and-production facility there, and Mitsubishi has set up production near a major science park, employing nearly 5,000 people.
Brittany is home to a small, resourceful company, Phytomer, run by Antoine GÉdouin, 33, and his father. Phytomer sells health-care and cosmetic products developed from seaweed, a resource in ample supply around the seaside town of Saint-Malo, where the company is based. GÉdouin, like many entrepreneurs in France, rails against "The French Mentality." He sees the French opting for comfort over risk. He tells a story about placing an ad in a national newspaper for a salesperson, someone who would travel, make his or her own hours, potentially make a lot of money. "We got two or three responses." Phytomer later placed an ad for an accountant, someone who would come in at 8:30 and leave at 6. "We got 100 responses," he says.
The GÉdouins have had numerous offers to sell the company, which has no debt and an after-tax profit of 10% -- very high by French standards. The company is not for sale. Phytomer, with sales of $8 million, has a neat little franchise in France. But in GÉdouin, trim and alert behind his big desk, there is a man who wants to take on the world. On the wall behind him hangs a map of Japan. On his desktop under plate glass lies a map of the United States. Phytomer exports to both countries. It has joint ventures in both. It has bought minority stakes in its foreign partners. GÉdouin exudes a fascination with the American market; he relishes the surprises that come from doing business in different cultures. Where exactly is his American venture partner located? Phytomer, a French cosmetics company with cachet, has doubtless established a beachhead in one of the capitals of fashion, New York City or Los Angeles. "Here," says GÉdouin, pointing to a spot on the map before him. "Salt Lake City."