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France and tech start-ups: Bad romance?

Criteo, Scality, and eBay are all global digital companies with two things in common: they were founded by French people, but none of them are listed in France.

While software company Scality and online marketplace eBay were launched on U.S soil by French entrepreneurs, Criteo is a home-grown French start-up that seduced global investors with its online advertising solutions. But it inevitably listed on the Nasdaq, home to many other hot startups.

France appears to have the talent and know-how to foster the creation of successful technology companies, but when it comes to retaining them, its record is less than impressive.

Start-ups that stay, such as video-sharing website Dailymotion, have felt the full force of French protectionism, for better or worse. The government's refusal to approve Dailymotion's takeover by Yahoo halted the group's plans to boost international growth .

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Recognizing it needs to retain and foster home-grown tech talent, France has gone on a charm offensive. It has appointed a Secretary of State for digital to raise the profile of the French digital economy - and President Francois Hollande has visited French entrepreneurs in San Francisco.

Experts say many of the conditions are in place to nurture new start-ups, but international expansion and growth often prove difficult and costly.

Philippe Collombel, managing director at Partech Ventures and contrary to common preconception, says France has "the best early-stage financing apparatus" in Europe.

Since Dominic Strauss-Khan's stint as economy minister in 1997 there has been constant support for start-ups that never stopped, "even through the 2000 crash" and each following government has reinforced financing programs for start-ups.

Additionally, France is a very interesting market for digital companies due to the strong penetration of new technologies, Pierre-Dimitri Gore-Coty, regional manager at taxi app start-up Uber told CNBC in a phone interview.

France is a highly connected country. Data released in July 2013 in the Observatoire du Numerique report shows that 35.5 percent of the population had a subscription for high-speed internet at home in June 2012, making it the second best European rate, ahead of Germany and the U.K.

Mobile penetration is equally strong. In June 2013, there were 114.1 active SIM cards for every 100 inhabitants.

The French know-how is also touted as particularly strong. Francois Hollande's visit to San Francisco highlighted the fact. Silicon Valley start-ups are full of French engineers or business school graduates.

"France has an excellent tradition for engineering schools and, a group of business schools that train students of excellent calibre is currently emerging", Collombel said. But "the difficulty is not to create a company in France, it's to make it grow."

Global aspirations spell trouble

Expanding from and within Europe incur "huge costs" says Uber's Gore-Coty, as regulations, language and currency may be different. This, he says, is the "intrinsic difficulty" for French tech companies.

Xavier Niel, founder of French telecommunications group Iliad told CNBC by email that the "French market is a small market at the international level and Europe is still very fragmented with different regulations and languages."

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But also, contrary to the U.S., France and Europe in general lack a tech-specific investment platform. There is no Nasdaq equivalent, tech analysts are rare, and no-one buys tech-only funds, Collombel said.

"There is a lack of potential buyers from France and Europe, which means that a great start-up, has no other salvation, than an American exit."

Furthermore, for Uber's regional manager, the regulatory framework is much to blame.

"In my point of view, we still do not have a regulatory framework that's adapted to the digital economy", he told CNBC.

Collombel agrees the framework "is often inadequate" and innovation is slowed down because "if it's not provided for [in legislative texts] then it's practically illegal."

The "regulatory diarrhea" and "fiscal opportunism" not only deter foreign investments but also push start-ups to take the plunge and emigrate.

Finally, the entrepreneurial culture is not yet as developed as in other countries. Gore-Coty underlines that in the United States, there is an appreciation of failure and entrepreneurs who have tried and failed several times before "have more legitimacy to raise funds."

France is lagging in that area but perception is changing due to the "fundamental change in risk appreciation" occurring in French society right now, says Collombel. Role models are starting to emerge – such as Xavier Niel – and the mutual contempt between start-ups and blue-chip groups is thawing.

France must teach its youth to not abandon, to not be afraid of failure and promote competition and innovation, Niel said.

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