French President Emmanuel Macron wants France to become start-up nation

  • French President Emmanuel Macron wants to create France's own Silicon Valley.
  • France is among the developed market economies outside the U.S. where technology companies are significantly underrepresented, posing a big risk to the future.
  • French telecom billionaire Xavier Niel has launched the world's largest start-up incubator.

French President Emmanuel Macron is so enamored by technology innovation that he has described his own spectacular political rise in terms usually applied to internet start-ups. He once considered giving up politics for entrepreneurship, he said in a recent speech, but "pivoted the business model" to run for president.

French President Emmanuel Macron poses for a selfie as he arrives at the Viva Technology conference dedicated to start-up development in Paris on June 15, 2017.
Martin Bureau | Pool | Reuters
French President Emmanuel Macron poses for a selfie as he arrives at the Viva Technology conference dedicated to start-up development in Paris on June 15, 2017.

"I want France to be a start-up nation," Macron told attendees at VivaTech, an entrepreneurial conference in Paris last June. "A nation that thinks and moves like a start-up."

It's no surprise that Macron has made innovation a key element of his agenda to shake France out of economic stagnation and high unemployment.

France is among the big developed markets outside the United States that remain alarmingly underexposed to technology. Nick Colas, co-founder of independent market analysis firm DataTrek Research, recently noted that the MSCI EAFE Index, in which France is the third-largest market represented, is "a world where the internet essentially never happened."

The MSCI EAFE Index has an overall tech weighting of 6 percent, and only one of its top 20 stocks comes from the IT sector. The S&P 500, by contrast, is roughly 25 percent weighted to technology stocks, and its four largest weights are all tech stocks. The MSCI Emerging Markets Index tech weighting is even higher, at 29 percent.

The MSCI EAFE Index has outperformed the S&P 500 in 2017, but Colas wrote, "We simply don't see how EAFE Index can outperform long term in a world dominated by technological disruption." That's because its recent run of success has been driven more by central bank bond buying and lowered interest rates than organic earnings growth for innovative stocks.

"We simply don't see how EAFE Index can outperform long term in a world dominated by technological disruption." -Nick Colas, co-founder of DataTrek Research

A 2014 study for the World Economic Forum concluded that "European conditions are far from ideal for entrepreneurs and fast-growing companies, and fragmentation hinders access to markets, sources of capital and supportive initiatives. "As the global innovation frontier moves inexorably forward, Europe is in danger of falling further behind, putting at risk its outlook for productivity, growth, human capital development and job creation," the report stated.

Pursuing innovation is clearly more than a matter of pride, and France has plenty of reason to worry. The annual IMD World Digital Competitiveness rankings place France 22nd in 2017 (Singapore is first, and the United States is third).

Macron sees technology innovation as the way for his country to move up. The Macron government is expanding capital available to start-ups, proposing tax changes that will encourage more private investment and supporting private initiatives. The trend is the right direction.

Tech.eu, a site that tracks European venture investments, reported that France edged up to third place in Europe last year with $3.16 billion in VC investment, behind the U.K. and Israel (Israel, Turkey and Russia are all classified as European tech industries in this ranking). French investment is up 26 percent in the first three quarters of 2017 over the same period last year, according to Tech.eu.

French billionaire launches world's largest incubator

One of the most visible private efforts to boost start-ups is Station F, billed as the world's largest start-up incubator, with space for more than 1,000 start-ups. It was launched in July by billionaire telecom entrepreneur Xavier Niel with 250 million euros ($290 million) of his own money. Just four months since opening, all 3,000 workspaces at the incubator are taken.

Station F aims to provide a complete ecosystem for budding entrepreneurs, from 3-D printers to legal expertise to a branch of the French post office. Partners in Station F include Google, Facebook and Microsoft.

A rendering of the Station F campus
Station F
A rendering of the Station F campus

"We want the entrepreneur to focus on his product," said Niel, whose goal is to help France escape the image of a country known only for museums, gourmet cuisine and luxury goods. But Niel says it's also unrealistic to expect French industrial giants to pivot into digital dominance. "You can't expect Carrefour [a giant retail/supermarket chain] to become Amazon," he said.

France fell behind when the tech start-up boom took off in the 1990s. The French tax system, rigid labor laws and a culture of avoiding risks resulted in fewer French start-ups than in other European countries, and companies started closing or selling out before they got big enough to get noticed. But successive French governments have taken steps to even the playing field.

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The government of Nicolas Sarkozy was the first to talk up innovation and take steps to reduce red tape for small companies. François Hollande launched BPI, a public investment fund that is the biggest French investor in start-ups. Macron has pledged $11 billion to back disruptive technologies and introduced a four-year tech visa for entrepreneurs to come to France. He has proposed tax reforms that would tax capital gains, interest and dividends at a flat 30 percent, versus a top rate of 45 percent currently. Macron, whom the opposition has tagged "President for the rich," reminds his audiences that "entrepreneurship is a French word, stolen by the Anglo-Saxons."

These initiatives come at a time when the culture of business in France is also transforming. Alice Zagury, CEO and co-founder of four-year-old Paris incubator The Family, says the trigger was the recession of 2008. "There were no jobs," she recalls. "People had the opportunity to think about what they wanted to do." The interest in start-ups surged. The Family hosts 100 start-ups each year.

Roxanne Varza, director of Station F, said it is benefiting from the new enthusiasm. "It's a big cultural shift," she said. "All the schools have entrepreneurship programs. Everyone wants to be a start-up founder."

Growing from a start-up to a significant size has been a challenge for French entrepreneurs. "There is still a lack of big local VC funds," said Sébastien Laye, a French-American entrepreneur and research fellow at the Institut Thomas More, a think tank based in Brussels and Paris. More successful exits are starting to emerge. Video ad platform Teads was sold to Dutch telecom giant Altice in March for $300 million, and Zenly, a social mapping app, was bought by Snap in June for a similar amount. These acquisitions also indicate a shift in attitude in the bureaucracy. In 2013 the government blocked the sale of streaming site Dailymotion to Yahoo, arguing it was a "rare French success story" that needed to stay in France.

Gilles Babinet, a French serial entrepreneur and former president of the French National Digital Council, says France has other glaring weaknesses. "Not one of the top 20 schools for computer science is in France," said Babinet. "We keep losing rank in PISA (the annual worldwide test of math skills among 15-year-olds). He says countries that succeed in digital technology have clusters of 15,000 people or more, such as in Silicon Valley, San Francisco and New York. He thinks start-up incubators like Station F and The Family are bringing that critical mass together.

Beyond exits, investors would like to see more French start-ups achieve unicorn status — a valuation of $1 billion or more — a group that currently includes ride-sharing service BlaBlaCar and cloud-computing company OVH.

There are those who still worry about the French government's role in promoting start-ups. Laye says the French government should not be investing in start-ups. "There's not enough private money and too much state money," he said. "If you're not supported by the French state, you're nowhere."

Laye thinks the French government should finance early technologies, like artificial intelligence. He's on the same wavelength as Macron, who has proposed a European Innovation Agency to support early stage technologies, as did the U.S. agency DARPA decades ago. Laye supports efforts like Station F, but he would like to see more decentralization. "We have as many incubators in Paris as there are in London," he said. "We need incubators outside of Paris."

Zagury says the shift in mentality is the most important change. And while "the new generation is trying to make the world better," it's not just the millenials who are getting aboard. Former President François Hollande has acquired an office at Station F. Billionaire Niel says that Hollande plans to be there every week.

By Joel Dreyfuss, special to CNBC.com

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