Boosting the French Tech Ecosystem
Cracking the Code
OCTOBER 9, 2015
The French ecosystem has been booming for the past five years has proven its ability to generate Unicorns like Criteo , Showroomprive or Blablacar and the next wave is coming with a strong number of fast growing and disruptive start-ups including Peopledoc , Withings , Algolia , Doctolib , Food Assembly or Sigfox. Accel has been at the forefront of this new wave and we have been actively investing in France. In the past few years, we have deployed more than $130m in companies including Showroomprive, Blablacar, Peopledoc and Algolia and we don't intend to slow down. The current administration - and in particular the ministers Axelle Lemaire and Emmanuel Macron - have been working hard to help the development of the ecosystem and seek feedback from venture investors. Emmanuel Macron during the workshop in Versailles In this context I was invited, together with a large dozen of foreign investors, to participate in a workshop to discuss what France could to do to attract more venture capital from global firms. The workshop was held in the palace of Versailles followed by a dinner at the Elysees to share the salient points of our discussion with Francois Hollande. To prepare the discussion, I worked with my colleague Pia d'Iribarne on a short memo summarizing a few elements that could be addresses in the labor law to reduce complexity and increase the agility of start-ups. These suggestions are coming for a large part from the founders and CEOs of several French start-ups we have reached out to and are articulated around four themes: Limiting the burden of social charges Enabling start-ups to attract foreign talents Reducing the burden of regulatory compliance Send a strong PR message to the Tech and investor community The core idea would be to create a simple framework for start-ups - defined as companies of less than 10 years old and or loss making - for which different rules would apply. The feedback was well received, so I hope that some of these ideas will make their way in the new laws around labor. 1. Limit the burden of social charges for start-ups Start-up founders have the option to select any country to start their new company and today, the burden of social charges does not make France standout in a positive light in the global tech ecosystem. Making changes in this area would be a key element in making France more competitive and attractive for foreign investors and founders. We understand that the new law will address all companies and not only start-ups, and have tried to make suggestions more broadly applicable but with a strong impact on start-ups. The CIR and JEI are going into this direction but the following suggestions would help further: a. Implement a gradual scale for social charges applicable to new companies, which would catch up with the current level after a period of 7 to 10 years. This would help companies get off the ground and create jobs faster while catching-up with the current regulation after a few years b. Cap social charges for loss making companies in their first 10 years: in a period of stress, companies would be better off keeping more of their workforce but paying less charges than having to layoff massively. Many start-ups are going through ups and downs and this change would both incentivize them to hire more when things are going well and lay off less people in the downturns Examples from other countries: Russia reduced IT companies’ social contributions from 30% to 14% until the end of year 2017 2. Enable start-ups to attract foreign talent Access to talent is key to improve the success of tech start-ups. While France is very strong on the engineering side, attracting foreign sales, marketing and product talents is often necessary. A few measures that could help: Unique perspective on the Galerie des Glaces without any tourist around! a. Cap the income tax at 25% for foreigners during their first few years in France (5-6 years – typical duration of a position in a start-up). This measure could be limited to company less than 10 year old and could also be extended to French people who have not worked/resided in France for the past 5 years and want to come back (link to the initiative “Reviens Leon”) Examples from other countries: Spain’s “Beckham Law”: under the terms of Royal Decree 687/2005, (10th June), enacted to amend the Income Tax Regulations under Royal Decree 1775/2004, (30th July) which govern the special fiscal regime applicable to Non-Resident Income Tax, any foreign nationals coming to work in Spain may apply to be taxed as non-residents. At the time of enactment, the tax rate was set at around 24%, instead of the average income tax rate which was around 43%. The Netherlands has a special tax regime for expatriates - known as the 30% regulation – which entitles them to a tax-free cost reimbursement of 30% of the salary (with some technical adjustments). The employee is then, in essence, no longer entitled to separate general tax free reimbursement of expenses, in relation to the assignment to the Netherlands. b. Lower social charges for foreigners joining a company less than 10 years old. Given the differences in salaries between France and the US or the UK in particular, having lower social charges would help fill the salary gap as well. This measure could also be extended to French nationals who are coming back after 5 years to France and could be limited in time (5-6 years) c. Create a visa with express application for foreigners working for companies less than 10 years old. Time is critical for start-ups and having express visa would reduce the hiring friction Examples from other countries: In the Netherlands, immigration law changed on 1 January 2015, offering a new visa for start-up founders from non-EU countries. The scheme’s associated residence permit entitles the applicant to be a resident of the Netherlands for one year. A prerequisite, however, is that the start-up must be guided by an experienced mentor who is based in the Netherlands. This means that within that year, the start-up entrepreneur can develop a sustainable a business based on an innovative product or service under the guidance of the experienced mentor. 3. Reduce burden of regulatory compliance for young companies under 10 years old Applying the same regulation to fast moving start-ups as to other companies increases the complexity of running the business, and the cost of compliance in time and legal fees is high. Here are a few suggestions that would help reduce this burden: a) Comite d’Entreprise and Employee representations: while these representations are very important for larger companies, they are not designed for start-ups and are a real burden for founders. Adapting the law to introduce a notion of company age could be a way to limit the impact on start-ups. For example, the law could specify that companies require a CE only after 5 years post incorporation (in addition to the compliance period, this would be 7-8 years before it is put in place). b) Standard lay-off package: laying-off people in France is something that any entrepreneur or foreign investor fear because the process is lengthy, complex with an uncertain outcome. For start-ups, this complexity may make the difference between life and death as a few months of cash runway means everything. Giving start-ups the ability to lay-off people with a standard package of 3 months salary without further negotiation would make things easier (this is the way it works in the UK or the US). This measure could be limited to companies less than 10 year old and loss making to limit the scope but make it very relevant for start-ups. Frederic Mazzella addressing Francois Hollande and John Chambers at the Elysee dinner 4. Change France’s image with a strong PR message about a new law favoring start-ups France is mostly known abroad for the 35-hour week, and the 75% tax rate it tried to introduce (and was fortunately considered unconstitutional). However, these measures are always announced first and then mitigated by a lot of exceptions in the law. These exceptions are usually not communicated or understood abroad – they are often too complex and not newsworthy. It is time for France to announce something going the other way, something that would change our image. Some of the ideas above, if well communicated, could help improve the image of France in the eyes of foreign investors. It was really refreshing to see the openness of the government around these ideas and I look forward to continuing to work on these initiatives to improve the competitiveness of the French ecosystem and enable startups to reach escape velocity much faster! PS: many thanks to Pia who joined us recently for her contribution to this post.