The emergence of start-ups 9781786304506, 1786304503

Table of contents :
Content: Introduction ixChapter 1. The Influence of the Ecosystem on the Development and Financing of Start-ups 11.1. Contextual framework: the needs and challenges of start-ups 21.1.1. The start-up, a 21st-Century initiative 21.1.2. Financing of start-ups 81.1.3. Start-ups in different spaces: context of comparison 141.2. Analysis of the two spaces according to the criteria for successful fundraising: revealing a correlation between the environment and start-up financing 201.2.1. The political influence of ecosystem development 211.2.2. The attractiveness of the spaces: training and information 311.2.3. The digital revolution: the opening of markets and financing methods 361.3. Research methodology 411.3.1. Qualitative study conducted through semi-directive interviews 411.3.2. Analysis and interpretation of the results collected 441.3.3. Validation of hypotheses: the influence of the ecosystem on the financing of start-ups 511.4. Conclusion 52Chapter 2. Financing Young Innovative Companies in France 552.1. Introduction 552.2. Contextual framework: young innovative companies in France 562.2.1. Characteristics of young innovative companies 562.2.2. Impact of innovative entrepreneurship on growth 582.2.3. Financing innovative entrepreneurship 612.2.4. France's place in the financing of young innovative companies 702.3. Empirical study: analysis of entrepreneurial dynamics in France 722.3.1. Method of analysis 722.3.2. The strategy of funding assistance institutions 752.3.3. The strategy of innovation entrepreneurs 792.4. Reinforcing aid for the financing of young French companies 822.4.1. Lessons learned from foreign models 832.4.2. The American model 832.4.3. The British model 852.4.4. The case of Singapore 882.5. Strengthening participatory financing structures 902.5.1. Characteristics of participatory financing 902.5.2. Interest of participatory financing 922.6. Economic recommendations 932.7. Conclusion 94Chapter 3. Equity Crowdfunding of Start-ups in France 973.1. Introduction 973.2. Contextual framework: state of play on the financing of start-ups in France 993.2.1. The evolution of entrepreneurial finance and sources of financing 993.2.2. Financing practices of start-ups 1063.2.3. The process of raising funds from private investors 1123.3. Equity crowdfunding: a fast-growing financing alternative 1203.3.1. Presentation of participatory financing and equity crowdfunding 1203.3.2. The stakes and limits of equity crowdfunding 1273.3.3. Complementarity of financing methods 1323.4. The entrepreneur at the head of strategic decisions 1353.4.1. Meeting with entrepreneurs: presentation of the study conducted 1363.4.2. The perception of financing by entrepreneurs 1393.4.3. The success of the company as perceived by entrepreneurs 1443.5. Conclusion 146Conclusion 149References 153Index 165

Citation preview

The Emergence of Start-ups

Modern Finance, Management Innovation and Economic Growth Set coordinated by Faten Ben Bouheni

Volume 1

The Emergence of Start-ups

David Heller Sylvain de Chadirac Lana Halaoui Camille Jouvet

First published 2019 in Great Britain and the United States by ISTE Ltd and John Wiley & Sons, Inc.

Apart from any fair dealing for the purposes of research or private study, or criticism or review, as permitted under the Copyright, Designs and Patents Act 1988, this publication may only be reproduced, stored or transmitted, in any form or by any means, with the prior permission in writing of the publishers, or in the case of reprographic reproduction in accordance with the terms and licenses issued by the CLA. Enquiries concerning reproduction outside these terms should be sent to the publishers at the undermentioned address: ISTE Ltd 27-37 St George’s Road London SW19 4EU UK

John Wiley & Sons, Inc. 111 River Street Hoboken, NJ 07030 USA

www.iste.co.uk

www.wiley.com

© ISTE Ltd 2019 The rights of David Heller, Sylvain de Chadirac, Lana Halaoui and Camille Jouvet to be identified as the authors of this work have been asserted by them in accordance with the Copyright, Designs and Patents Act 1988. Library of Congress Control Number: 2019932336 British Library Cataloguing-in-Publication Data A CIP record for this book is available from the British Library ISBN 978-1-78630-450-6

Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

ix

Chapter 1. The Influence of the Ecosystem on the Development and Financing of Start-ups. . . . . . . . . . . . . .

1

1.1. Contextual framework: the needs and challenges of start-ups . . . . . . . . . . . . . . . . . . . . . . . 1.1.1. The start-up, a 21st-Century initiative. . . . . . . 1.1.2. Financing of start-ups . . . . . . . . . . . . . . . . . . 1.1.3. Start-ups in different spaces: context of comparison . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2. Analysis of the two spaces according to the criteria for successful fundraising: revealing a correlation between the environment and start-up financing . . . . . 1.2.1. The political influence of ecosystem development . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2.2. The attractiveness of the spaces: training and information . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2.3. The digital revolution: the opening of markets and financing methods . . . . . . . . . . . . . . . 1.3. Research methodology . . . . . . . . . . . . . . . . . . . . 1.3.1. Qualitative study conducted through semi-directive interviews . . . . . . . . . . . . . . . . . . . . 1.3.2. Analysis and interpretation of the results collected . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3.3. Validation of hypotheses: the influence of the ecosystem on the financing of start-ups . . . . . . 1.4. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Chapter 2. Financing Young Innovative Companies in France . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1. Introduction . . . . . . . . . . . . . . . . . . . . . . 2.2. Contextual framework: young innovative companies in France . . . . . . . . . . . . . . . . . . . . 2.2.1. Characteristics of young innovative companies . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.2. Impact of innovative entrepreneurship on growth . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.3. Financing innovative entrepreneurship . . 2.2.4. France’s place in the financing of young innovative companies . . . . . . . . . . . . . . . . . . 2.3. Empirical study: analysis of entrepreneurial dynamics in France . . . . . . . . . . . . . . . . . . . . 2.3.1. Method of analysis . . . . . . . . . . . . . . . . 2.3.2. The strategy of funding assistance institutions . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.3. The strategy of innovation entrepreneurs 2.4. Reinforcing aid for the financing of young French companies . . . . . . . . . . . . . . . . . . . . . 2.4.1. Lessons learned from foreign models. . . . 2.4.2. The American model . . . . . . . . . . . . . . 2.4.3. The British model . . . . . . . . . . . . . . . . 2.4.4. The case of Singapore . . . . . . . . . . . . . . 2.5. Strengthening participatory financing structures . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5.1. Characteristics of participatory financing . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5.2. Interest of participatory financing . . . . . 2.6. Economic recommendations . . . . . . . . . . . . 2.7. Conclusion . . . . . . . . . . . . . . . . . . . . . . .

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Chapter 3. Equity Crowdfunding of Start-ups in France . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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3.1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2. Contextual framework: state of play on the financing of start-ups in France . . . . . . . . . . . . . . . . . . 3.2.1. The evolution of entrepreneurial finance and sources of financing . . . . . . . . . . . . . . . . . . . . . .

97 99 99

Contents

3.2.2. Financing practices of start-ups . . . . . . . 3.2.3. The process of raising funds from private investors . . . . . . . . . . . . . . . . . . . . . 3.3. Equity crowdfunding: a fast-growing financing alternative . . . . . . . . . . . . . . . . . . . . 3.3.1. Presentation of participatory financing and equity crowdfunding . . . . . . . . . . . . . . . . 3.3.2. The stakes and limits of equity crowdfunding . . . . . . . . . . . . . . . . . . . . . . . . 3.3.3. Complementarity of financing methods . . 3.4. The entrepreneur at the head of strategic decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4.1. Meeting with entrepreneurs: presentation of the study conducted . . . . . . . . . . . . . . . . . . 3.4.2. The perception of financing by entrepreneurs . . . . . . . . . . . . . . . . . . . . . . . 3.4.3. The success of the company as perceived by entrepreneurs . . . . . . . . . . . . . . 3.5. Conclusion . . . . . . . . . . . . . . . . . . . . . . . .

vii

. . . . . . 106 . . . . . . 112 . . . . . . 120 . . . . . . 120 . . . . . . 127 . . . . . . 132 . . . . . . 135 . . . . . . 136 . . . . . . 139 . . . . . . 144 . . . . . . 146

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153 Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165

Introduction

This book is dedicated to European start-ups, specifically French start-ups. Herein we analyze three main parts: the influence of the ecosystem on start-ups, the different methods of financing innovative companies, and financing by equity crowdfunding in France. To conduct our analysis, we use concrete examples and interviews with targets. The word start-up is an ellipsis of start-up company, an expression designating an innovative company that is starting (start) and is subject to strong growth potential in the new technologies sector (up). However, this rapid development implies fragile growth that is dependent on an ecosystem-like environment. The balance is based on informed support, an appropriate legal framework, an attractive market and, more particularly, abundant financing solutions. It is in this sense that Chapter 1, entitled “The Influence of the Ecosystem on the Development and Financing of Start-ups”, has a dual microeconomic and macroeconomic dimension. Indeed, the main start-ups have emerged in the United States and Europe, and we have adopted an international comparative approach in order to understand the financial development patterns of start-ups in several Western and developing countries. Focusing on the available human, political and economic levers, the main issue of this

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first part is as follows: how does the geopolitical and economic environment favor the financing of start-ups? The empirical study is based on the results of interviews conducted with French investors, financing professionals in the African market, coaches and a founder of start-ups. The conclusion shows a very significant impact of new technologies on the financing of companies in general and start-ups in particular. In addition, French political strategies are being put in place to promote and support the development of innovative companies (such as French Tech) to ensure the stability of the French market. The second part includes Chapter 2, entitled “Financing Young Innovative Companies in France”, which puts the financing possibilities of start-ups into perspective in the context of the dynamics of the French market. Given the reluctance of traditional commercial banks to finance young innovative business projects and, at the same time, the ambition of the Head of State to make France “the nation of start-ups” (Lacroix.com 2017), we deal with the following issue: how to facilitate the financing of start-ups in France? Indeed, the development of these companies is an important issue for growth and employment in France, but, depending on the developmental phases, financing is more or less difficult to implement. The results of this empirical study, carried out among leaders of young innovative companies and representatives of organizations providing support for their financing (Bpifrance and Business France), particularly highlight the fact that incentives for start-ups to finance themselves through government policies are more developed in the United States, the United Kingdom, Germany, Scandinavia and Israel than in France. However, the entrepreneurs interviewed acknowledge the usefulness of public support during the project start-up phase, but state that they have difficulty finding appropriate financing when

Introduction

xi

it comes to growth. Thus, the recommendations focus on the development of venture capital and business angel networks in France. Finally, they aim to encourage the development of participatory financing or “crowdfunding”, an effective alternative to traditional financing methods. Chapter 3, entitled “Equity Crowdfunding of Start-ups in France”, aims to analyze the relevance of equity financing. Through previous research, we have found that it is difficult for French entrepreneurs to finance themselves through traditional means. Many financing alternatives exist for entrepreneurial projects such as love money, business angels, investment funds, banks, public subsidies or the public investment bank. Of all existing financing alternatives, the opening of capital to external investors is the one that allows companies to raise the most funds while providing a significant network to the company in the startup phase. Equity financing is a new form of capital opening that simply encourages significant fundraising. However, the “crowd” is not expert and the number of investors is large, which poses problems in terms of valuation and governance for the company. Here, the problem is therefore the following: how can equity crowdfunding position itself as a successful financing alternative for start-ups given the entrepreneur’s human capital? This empirical study was conducted with several entrepreneurs. Even though none of our targets have already been financed by equity crowdfunding (all of them even admit to being somewhat reluctant to open their capital for governance reasons), young entrepreneurs accept the idea of being able to use this long-term financing. However, they highlight the need to preserve human capital, which is essential for the sustainability of the project.

1 The Influence of the Ecosystem on the Development and Financing of Start-ups

The key point that differentiates start-ups from SMEs (small and medium-sized enterprises) is the recurring need for financing. In this context, the environment in which the young company operates is predominant in terms of its geopolitical and economic aspects. Start-ups are companies with rapid growth that remain fragile and dependent on human, legal, tax and financial factors. The most successful start-ups come mainly from Western countries. It therefore seems interesting to conduct a comparative study with developing countries to understand the key success factors. This leads us to the following question: how does the geopolitical and economic environment favor the financing of start-ups? First, we will review the literature on the financing processes and key success factors of start-ups around the world. A cross-analysis between two socio-economic contexts will be carried out to differentiate the two study parameters. Then, we look at the levers available to promote the financing of start-ups: tax or through government policies, initially, then according to human and geopolitical factors.

The Emergence of Start-ups, First Edition. David Heller, Sylvain de Chadirac, Lana Halaoui and Camille Jouvet © ISTE Ltd 2019. Published by ISTE Ltd and John Wiley & Sons, Inc.

2

The Emergence of Start-ups

Finally, we look at the impact of the digital revolution, which is totally changing the modes of communication and operation and thus modifying start-ups and their financing methods. Finally, through a field study with professionals in the sector, we will study how start-ups adapt to the environment and how financing solutions follow the path of the digital revolution. 1.1. Contextual framework: the needs and challenges of start-ups The objective of this first part is to understand the evolution of young innovative companies and their specificities in terms of development and financing through different social economic contexts. 1.1.1. The start-up, a 21st-Century initiative The meaning of the term start-up has not changed since its emergence at the beginning of the 20th Century. On the other hand, in the 21st Century, the number of companies referred to by this term has increased significantly. Also, economic theories show how start-ups are a major issue today. 1.1.1.1. The characteristics of start-ups In France, the first investments for new white coal companies were made between 1920 and 1928. These are the first speculations for these new companies. On Wall Street, the movement was even earlier, in 1912, with radiomania1.

1 A period in the stock market history of the 1920s characterized by massive investment in companies broadcasting radio programs.

The Influence of the Ecosystem on the Development and Financing of Start-ups

3

Many start-ups taking advantage of technological advances in financial services technology (FST) have been able to receive significant investments to finance their development. The example of Hewlett-Packard (HP), which was founded in 1939 in a Californian garage, shows that, very early on, enthusiasm for these initiatives was significant. The term gained significant popularity in the late 1990s with the emergence of small start-ups linked to information and communication technologies, promising huge profits. These start-ups, now known as GAFAs2 (for Google, Apple, Facebook and Amazon), are now web giants who dominate their market and have a particularly important place in society. (Facebook has more than two billion users.) Today, the sectors that are most attractive are services, communication (including social networks), on-demand services, health (biotechnology, nanotechnology and other MedTechs3), information, e-commerce, but especially Big Data and artificial intelligence technologies. They are home to some of the 15 start-ups with a value of at least $1 billion. Start-ups appear to be the future of entrepreneurship and offer benefits for both entrepreneurs and investors, as well as for innovation in a broader sense. Start-ups alone represent the race to modernization and innovation. On the other hand, the context in which these structures are created is a direct component of their success. Bill Gross Entrepreneo (2016), a multi-entrepreneur and American financier, agrees that the criteria for a start-up’s success

2 GAFA or “web giants” refers to: Google (1998), Apple (1976), Facebook (2004) and Amazon (1994). 3 MedTech stands for Medical Technology.

4

The Emergence of Start-ups

vary according to the project, but certain criteria are essential: – the idea or concept and the need it addresses; – the team that will carry out the objectives and the ability to find the necessary skills; – the business model to make investments profitable; – financing to support its development and the cost of development; – the timing of the market. Patrick Fridenson, a business historian and director of studies at the École des Hautes Études en Sciences Sociales, characterizes a start-up as a company with very strong growth, using new technology, targeting a new market with strong potential and meeting a significant financing need, hence the call for fundraising. This last point is the central issue of a start-up, which faces significant financing needs to support its development and growth. Turning to external funders is a necessary step for all these structures. Fortunately, the proposed alternatives to these structures have multiplied and now allow a large number of projects to deal with these problems. 1.1.1.2. Financing motivations and theories of young innovative companies The choice of investments in start-ups is made according to many criteria: – Profitability and liquidity risk: for venture capital investments, after analyzing the project, the market and the team, experienced investors pay particular attention to the exit scenario envisaged by project leaders. The exit is the

The Influence of the Ecosystem on the Development and Financing of Start-ups

5

only way to make the investment profitable. These routes are mainly: - industrial transfer, - initial public offering (IPO), - sale of shares to historical shareholders, - sale to new investors. Only transfers to an industrial company or initial public offerings make it possible to make significant profitability multiples. Analysis of the market situation, as well as the presence of both powerful industrialists, and the evaluation of the zone stock market power are an essential element. Geopolitics is therefore central to the decision. – Financial projection, value proposition and market potential: this takes into account the nature of the investment, the time required to reach break-even point, the company’s level of development and the maturity of the fundraising (ability to already have guaranteed investments). It is essential that the project has clear financial data, indicating the time required to reach breakeven point. A large (demographic and wealth) and stable (economic, political and social) market is therefore essential. Legal protection also plays a role in this market; the project must be able to protect its main assets (the result of its R&D) through patents and an efficient and valuable intellectual protection system. – Macroeconomic criteria at the level of the equity portfolio: the investment decision will depend on the expected overall profitability of the portfolio and the ability of the portfolio to achieve the profitability objectives. This factor is all the more true for investments in the start-up phase for which the loss ratio is high. It can be calculated by estimating the flows generated by the company in the short

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The Emergence of Start-ups

term (venture capital investment does not exceed 7 years for the longest equity investments). 1.1.1.2.1. Agency theory The agency theory, which was postulated by Michael C. Jensen and William H. Meckling in 1976, studies the economic consequences of the separation between the sources of capital (investors) and managers (start-up managers). The most accurate definition would be: “An agency relationship is a contract by which one or more persons (the principal) engage another person (the agent) to perform on their behalf any task that involves delegation of some decision-making power to the agent” (Akerlof 1970). It can be translated into the following formula: U = U (W, P, A, A, J) + U (B, C) where: – U = the usefulness of manager; – W = the position (or order) of manager; – P = the social status of manager; – A = self-realization; – J = the manager’s remuneration; – B = the invisible income of the manager; – C = income required by prevarication. This theory can explain the relationships between the actors in a funded start-up. Their only common objective is to make their investment grow. There is thus a problem of asymmetry of information between the investor and the manager who wants to keep his weight in his company.

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1.1.1.2.2. Theory of information asymmetry The question of the information available is essential for the investor, regardless of his size and financing capacity. In this paper, we will study the consequences of poor communication of information, but it is possible to introduce the theory of Modigliani Miller (1958) at this stage. The theory explains that, in the absence of informational problems between the entrepreneur and his external lenders, the cost of financing is equal to their opportunity cost alone, and the sources of financing (external and internal) are substitutable. But in the event of asymmetric information, this problem creates a finance premium that increases the cost of external financing, sometimes even to the point of preventing the operation for reasons of mutual trust. 1.1.1.2.3. Silicon Valley theory Martinaud (2012) argues that the ratio in Silicon Valley4 was one unicorn per 100,000 companies created, which will not reach a reasonable level of success. The most faithful illustration of this theory: Google would never have existed without the 99,999 companies that have, at the same time, failed or not so well succeeded [...] The overall success of the innovative entrepreneurship approach in an economy is based as much on this single company that will be globally successful as on the ecosystem that has allowed the 100,000 companies to exist so that one of them can emerge as a black swan in a chess flow. This theory highlights the importance of the ecosystem in the development and success of a start-up that inevitably 4 Refers to the high-tech industrial center located south of San Francisco Bay.

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involves a series of financing rounds made possible by a start-up ecosystem. 1.1.2. Financing of start-ups The question of how to finance start-ups is essential. To ensure their development, they have a recurring need for funds. Several solutions are available to them. As a general rule, they use dilutive or non-dilutive funds (Debauge 2012). 1.1.2.1. Traditional financing solutions To finance themselves, start-ups use “classic” or historical solutions with some specificities (Finance Innovation 2016). The first funds come from the entrepreneur himself, his accumulated savings sometimes supplemented by a bank loan. He can spend the first few months in an incubator that provides him with premises and services in exchange for a small percentage of the young company. – “Love money” Family or friends are often some of the first investors. The primary motivation is affect and then interest in the project rather than financial reasons. The amounts raised are usually a few tens of thousands of euros. – Bank and personal loans These are one of the most commonly used forms of financing as an SME. But when it comes to investing in start-ups, banks are more cautious. The objective is to convince them with a business plan to inject money into a risky project. However, in this case, the bank does not acquire any shares in the company. It therefore turns to more or less heavy guarantees. Ueda (2004) assumes that external financing may come from banks or venture capital

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firms. But, with the bank, the firm faces an anti-selection problem, while the expertise of the venture capitalist allows it to objectively identify the risks related to the company. – Business angels They are individuals who seek to make their skills, as former executives or company managers, available, while investing part of their personal assets, at the same time, benefiting from tax exemption. They are found early enough in the company’s life to provide concrete support for the start-up’s development. They therefore have an important place in the lives of these start-ups as funders and mentors. They also play a prominent role in society by participating in financing immediately after the company’s creation. They generally expect an internal rate of return of 20%. – Venture capital These are companies that operate on slightly higher amounts (€500,000 to €5,000,000) and at a more advanced stage of maturity (La Tribune 2016). This step is to professionalize the company with a view to rapid and global development. Unlike business angels who invest their own funds, venture capital raises funds to invest when business angels invest their own funds (Van Osnabrugge 2005). By repeating what Ueda (2004) said, these actors have more expertise in financing start-ups. Their presence is inseparable from the development of start-up ecosystems. They require an internal rate of return of 36–45%. – Debt investor It is not advisable to use this alternative in the case of Internet start-ups or personal services. It is only if the startup uses assets whose value is independent of its activity

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The Emergence of Start-ups

(vehicles, equipment with a secondary market) that it can resort to debt. The sectors concerned are a priori catering, trade, transport and so on. It is only when the start-up validates a reliable business model that it can consider this alternative. 1.1.2.2. New financing solutions Since the beginning of the 21st Century, other financing methods have emerged. Strongly influenced by the Internet, financing is now more direct between a larger number of investors and innovative projects (Myexperteam 2015, pp. 13–32). Investments are also benefiting from the technological advances of the 21st Century, such as the digital revolution, which offers vast opportunities through the interconnection of actors and spaces. New investment solutions are emerging, which democratize more traditional models that provide many opportunities for investors and fundraising projects. – Crowdfunding5 Crowdfunding is a participatory finance, or “crowding”. It is a mechanism that collects financial contributions, usually small amounts, from a large number of individuals, through an Internet platform, to finance a project or company. Investors acquire shares in the company and become shareholders. Throughout history, many works have been financed by crowds, such as Mozart’s music (18th Century) or the Statue of Liberty (19th Century). A firm specializing in crowd equity6 estimates that crowdfunding platforms provided nearly $26 billion in financing worldwide in 2015.

5 Participatory financing. 6 Equity financing.

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– ICO7 ICO, or Initial Coin Offering, (Maddyness 2018) is a cryptomoney fundraising event. Blockchain8 start-ups can raise millions in just a few days. The principle of the ICO is to receive investments in exchange for tokens. In 2017, more than $4 billion was raised through ICOs around the world. It is a practice that is developing rapidly (two ICOs per week) with amounts reached in record time: Filecoin9 raised nearly $257 million and Brave raised $35 million in 30 seconds. One of the limits is the high volatility, which does not guarantee the value of the investment. Moreover, the quality of the project itself remains a challenge made on the Internet, without any in-depth expertise. There are two types of tokens: equity tokens10 and utility tokens11. – Online kitty The financing is participative, in the form of donations to companies or entrepreneurs without return of actions for repayment of the amount. The donor may, in exchange for his contribution, receive compensation in kind such as an object or a citation. Some theoretical works have even focused on the question of alternatives between financing methods for a start-up. For example, Bernhardt and Krasa (2005) studied the impact of competition between financing actors: banks, venture capital companies, business angels and “external” finance companies.

7 Initial Coin Offering, means cryptocurrency fundraising. 8 A technology for storing and transmitting secure information without a central control body. 9 Cryptocurrency. 10 Token giving right to an asset of the company. 11 Token giving right to a service.













Initiation

Scaling

Expansion

Environment and infrastructure

Advice and business development

Financing 

•

•

 





Table 1.1. The typologies of coaches and their role in the development of the start-up

 – Offer not present,  – Principal offer from the coach, • – Secondary offer from the coach.





•



•







•



•



Nursery







Accelerator











• •



•

Creation

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•



Fab Lab

Business incubator

Ideation

Incubator



•













Co-working space







•









Entrepreneur network

12 The Emergence of Start-ups

The Influence of the Ecosystem on the Development and Financing of Start-ups

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This experience shows the importance of having many solutions to facilitate both the financing of start-ups and their rapid development. The theory shows that to optimize an ecosystem, projects must be allowed to benefit from numerous market and financial opportunities, such as Silicon Valley and the models that have been inspired by it. 1.1.2.3. The cycles of a start-up: permanent support According to Mazzucato (2013), “venture capital has been most successful in the United States when it has provided not only financing, but also management expertise” , but not before adding, “It is naive to expect venture capital to lead at an early stage the risky development of any new economic sector today such as clean technologies for example. In biotechnology, nanotechnology and the Internet, venture capital has arrived 15 to 20 years after the first investments”, suggesting that public investments are important, but the presence of initial private investors is also essential in the early stages of start-up growth. Incubator – accompanies entrepreneurs during the ideation process (maturing the project and testing its validity before the company is created). Business incubator – focuses on creating start-ups and supporting them at this stage. It provides the company with a workplace shared with other entrepreneurs with access to technical tools, solutions and so on. Nursery – intervenes from the start-up and during expansion issues. Offers a work ecosystem and entrepreneurs, ideally from the same sector. There is no proposal for a financing or business development offer. Fab Lab – (also called the Manufacturing Laboratory), aimed at start-ups who create a material product and support them in the design of the prototype. Open to

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The Emergence of Start-ups

entrepreneurs as well as to students and citizens in general to experiment. Accelerator – focuses on the seed and scale-up stages, and provides training for business and sector experts. Above all, it offers financing solutions in cases of mutual interest. 1.1.3. Start-ups in different spaces: context of comparison The environment impacts the development of a project. The objective here is to present different contexts in which projects with specific characteristics evolve. 1.1.3.1. Western ecosystems with many similarities The study of environments with a high standard of living is the objective of the following study. The development challenges of start-ups are major themes in rich countries (Atelier BNP-Paribas 2016). The European Union provides many advantages to companies, particularly start-ups, by giving free access to a vast European market thanks to the Schengen Treaty and the creation of a European Economic Area. This market, dominated by France, Germany and the United Kingdom, has a population of 508.8 million and a total GDP of €13,000 billion (Journal de Net 2014). It therefore offers important opportunities, namely major sources of financing and growth. Bonnet (2015) states that “Europe can and must become the reference in terms of digital development and entrepreneurial initiative through digital twinning.” To this end, Europe has created an entrepreneurship Erasmus program to facilitate access to experiences across Europe, a “European Innovation”

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platform to share initiatives and good practices between each of the ecosystems, and a grant program for entrepreneurs ranging from €50,000 to €2.5 million. – France - Population: 68 million inhabitants - GDP: €2,575 billion (2016) - Start-ups: approximately 10,000 - Fundraising: 613 operations for $3,185 million, including 342 million in Paris (Les Echos Entrepreneurs 2018) More than two out of three French people are in the middle class. France is a developed, stable country with one of the most efficient health and education systems in the world. This advantage allows the country to benefit from a significant talent pool and economic stability conducive to the development of new opportunities. Paris alone concentrates between 3000 and 3500 start-ups for approximately 70% of investments12. The average fundraising ticket was €3.8 million in 2017. France has three unicorns (BlaBlaCar, Venteprivée.com and Criteo) valued at $8.1 billion cumulative. – Germany - Population: 82.3 million inhabitants - GDP: €3,358 billion (2016) - Start-ups: approximately 6,000 to 7,000 since 2012 - Fundraising: 382 operations for $3 billion

12 Bpifrance (2017).

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The Emergence of Start-ups

Germany is undoubtedly a reference in Europe with a large number of start-ups in many sectors. Through numerous structural reforms implemented in recent years in favor of start-ups, private entrepreneurship and companies, Germany has continued to take an important position on a global scale. The country benefits both from the important operations of its unicorns such as Delivery Hero/Foodora and from the many innovative start-ups created. The country’s advance is symbolized by these two driving cities, Berlin and Munich. Berlin is said to be the capital of European technology. In figures, it is now the seventh most attractive city in the world for start-ups, due to its capacity for significant venture capital investment. – The United Kingdom - Population: 65 million inhabitants - GDP: €2,848 billion (2016) - Start-ups: approximately 16,000 - Fundraising: $5.2 billion for approximately 350–400 transactions Many analysts have spoken up after “Brexit” to highlight the risks associated with this geopolitical decision to the British economy. On the other hand, the irremediable fall of its economy is still pending, and the figures for the start-up ecosystem, in particular, are still very encouraging in many respects. One of the figures that shows London’s superior attractiveness is the number of engineers and developers: from 303,594 across the Channel, we go down to 180,659 in Paris. The United Kingdom is undeniably the host country for start-ups in Europe. The ecosystem has the largest concentration of start-ups in Europe (in number and value),

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fundraising is on average higher, and companies and their founders have many tax advantages. British culture, closer to North American mentalities, helps London to shine considerably. The United Kingdom also benefits from the presence of corporate funds that are not afraid of venture capital or investment in the youngest start-ups (Löning 2017). – North America (Dutrey 1971) Between Europe and the United States, the balance is still very negative for Europeans in terms of the challenges to be overcome. The figures speak for themselves: in 2016, venture capitalists invested around €6.5 billion in the European Union (EU), compared to €39.4 billion in the United States. Of the 196 unicorns recorded worldwide, 111 are North American, 59 are Asian and 26 are European. In the United States, a start-up can develop within a linguistically unified territory of nearly 400 million inhabitants (including Canada). In addition to a vast market, entrepreneurship is very developed (145,000 start-ups, i.e. 1 per 2,000 inhabitants) and the structures to support it are well established (more than 1,000 incubators and $50 billion to finance innovation). 1.1.3.2. The emerging countries ecosystem: the case of the African continent With less financial diversity than the countries of the “economic North”, African countries have other characteristics that allow for effective development to some extent (Abdelkrim 2017). The choice to study Africa stems from the development potential of this continent (Fleury and Houssay-Holzschuch

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The Emergence of Start-ups

2012). For more than a decade, indicators have been encouraging: – sovereign debt increased from 85% of GDP to 40% on a continental scale; – growth rate of 5% on average over the last 12 years; – per capita income up 35% (continental scale); – implementation of policies to fight poverty, strong urbanization of States; – growing processing industries (refineries in Niger, textiles in Ethiopia); – significant population growth and young population (one billion in 2010, two billion in 2050); – increasingly important regional integration and “southsouth” exchanges to enrich the poorest countries. We can also distinguish several types of countries among our selection. First of all, there are States such as the Ivory Coast and Ghana that play an important role in Africa thanks to economic stability (L’Association d’Economie Financière 2014). Their development is due, in particular, to a certain political and social stability, an increasingly globalized economy and a rapidly expanding education system. Then there is another set of nations, including Nigeria and Botswana, that owe their wealth mainly to the raw materials that they exploit. Despite these positive points, handicaps remain: – the infrastructure is insufficient (roads, electricity, education system, etc.);

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– the savings rate is low (income inequality and savings flight); – social inequality remains (too few in the middle class); – the unemployment rate is very high; – dependence on primary commodity exports is the result of underdeveloped industrialization. The first obstacle in Africa is the lack of funding for risk and innovation. The deficit of seed investment13 or seed bank loans is significant and counts enormously in the early death rate of African start-ups. – Ivory Coast - Population: 26.6 million inhabitants - GDP: €31.7 billion (40% of West Africa’s GDP) The Ivory Coast is inexorably once again becoming the pillar of West Africa after more than a decade of political tension and instability. The country is looking to build a stable economy, a project in which the start-up ecosystem decided very early on to take an important part. The World Bank’s forecasts are reassuring (growth rate rising over the next three years from 8% in 2017). The Ivory Coast owes its wealth mainly to agriculture and the massive export of cocoa (the world’s largest producer: 40%), coffee and bananas. In addition, the country is rich in mineral resources that tend to guarantee a promising economic future through the exploitation of its resources.

13 Referring to the first round of funding (the initial investment required to launch a project).

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The Emergence of Start-ups

– Nigeria - Population: 191 million inhabitants (60% are under 25 years of age) - GDP: €490 billion (2016) As the largest economy in sub-Saharan Africa, Nigeria also has a large population, making it a major player on the African scene. The name “Giant of Africa” attributed to Nigeria reflects the economic and demographic weight of the country. The country has recently launched major structural reforms to strengthen its economy by reducing the importance of oil and gas revenues (14% of GDP today). The ecosystem is concentrated around two major metropolitan areas: Lagos, the economic, technological and financial lung of Nigeria, and Abuja, the political capital located in the center of the country. The start-up ecosystem is still developed there and reaches a value of $2 billion in Lagos that judiciously benefits an emerging middle class (36 million people). Nigeria’s significant potential attracts venture capital investors, particularly those who hope to be able to convert their financing with an initial value of €1 million to €100 million within one or three years. Some notable examples show that Nigeria is a start-up country: “Iroko TV” where the African Netflix has completed several rounds of financing at $30 million, as well as Jobberman, a job search application that was valued at $167 million for its acquisition by a local media. 1.2. Analysis of the two spaces according to the criteria for successful fundraising: revealing a correlation between the environment and start-up financing The environment plays a key role in the successful development of a start-up. It is clearly one of the key factors for the success of an innovative project. The objective here is to analyze the different levers (English and Henault 1996).

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1.2.1. The political influence of ecosystem development The question of developing an innovation-oriented economy is now on the agenda of major state policies. The State has many ways to implement this strategy (Nuissier 2008). 1.2.1.1. The State, the first organizer In France, a report by the Court of Auditors in October 2012 (Cours de Comptes 2012) expressly requested that public policies should focus more on “identifying companies with potential that will create the jobs of tomorrow and offering them specific support from the outset by coordinating all the players....” Mazzacuto (2013) also agrees: “Entrepreneurship success is not only about start-ups, nor venture capital. It is the willingness and ability of all economic agents to take risks resulting from a public incentive policy.”

Figure 1.1. Table of the evolution of a start-up and the financing that is linked to these successive cycles

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The Emergence of Start-ups

In the light of these studies, it can be said that public policies have a fundamental role in the establishment of this “ecosystem for start-ups.” These interventions are reflected in policies that promote the establishment and interaction between start-ups, companies in all sectors and actors wishing to implement all the conditions of scalability and prosperity for these start-ups. These major actors can be subdivided into categories such as universities, funding agencies and support organizations (incubators, accelerators, co-working spaces, legal and financial service providers). The common objective is to see the emergence of nuggets that will have an international influence in the short term. In light of this information, it is easy to understand that the main challenge of the start-up ecosystem is to enable start-ups to have access to significant funds as soon as they are created; the objective of a start-up being rapid start-up and then acceleration or take-off of the activity. Therefore, it is by providing them with significant investments that this ideal is more likely to be realized. A mix between public and private funds is therefore essential, which is why we will study the main attractiveness levers to attract private financing in start-ups. 1.2.1.1.1. Tax incentives In theory, taxation is one of the most important pillars that allows investment (especially private investment) and growth. Tax policies determine the framework in which trade and investment will take place. There is a common denominator between France, the United Kingdom and the United States, as shown in Table 1.2 on the following page.

The Influence of the Ecosystem on the Development and Financing of Start-ups

Country

France

United Kingdom

United States

Acronyms (non-exhaustive list)

Definitions (non-exhaustive list)

CIR1 and CCI2

Tax credit on Research and Innovation expenses

JEI3

Young Innovative Company (tax and social security contributions reduction)

ACCRE4

Assistance to Unemployed Entrepreneurs: exemption from tax in year 1

Result 5.567 billion in 2014

€245 M (exempt)

Equity Savings Plan (for investments in unlisted European companies, allows all PEA/PEA-PME5 capital gains on disposals to be tax-free after a minimum of 5 years)

IR-SME6

Income Tax Reduction for cash subscriptions to the capital of unlisted Small and Mediumsized Companies (up to 25% of the IR)

BSPCE7

Subscription form for Business Starter Shares (form allowing to subscribe to shares at a fixed price)

CPI8

PME Innovation, which allows entrepreneurs to reinvest their capital gains on sales and amortize them with any losses related to reinvestment

EIS9

Entrepreneur Investment Scheme: helping small, high-risk unlisted companies by offering a range of tax benefits

€72 M in 2018

£395m + £85m on capital gains

SEIS10

Seed Entrepreneur Investment

£80 M

ER11

Entrepreneurs’ Relief: reduction of capital gains tax

£2 000M

SBA12

Small Business Act, supports SMEs in the economic fabric (facilitating bank loans, total exemption from capital gains tax if CA