If we view all private equity investments as a pipeline with two ends, the input end (deal flows) and the output end (exits), the general conclusion is that PE firms have to fought hard to get both the the input and output ends, while VCs usually need only worry about the output end.
More specifically, public buyouts account for roughly 10% of the PE buyout deals today and obviously always trigger a bidding war if the target seems to be right. The rest of the deals are private buyout, either buying out a privately owned company or a portfolio company from another fellow PE firm. Either way, a PE firm has to go out to hunt those deals and always be prepared for competition.
On the VC side, generally the deals come automatically their way. As I described in the VC pitch-to-investment funnel post, a vintage VC receives thousands of pitches every year. The art at the input end then lies in screening for good deals. That said, in Silicon Valley it's generally recognized that for the best deals VCs have to go out to find them. A recent example would be Sequoia's Jim Goetz worked hard to persuade Whatsapp founder Jan Koum to take Sequoia's money even though the later didn't believe they needed this cash. Tier-1 VCs also generally refer good deals amongst themselves for co-investments, partly to avoid free-rider problems but mostly to reinforce the flows of good deals. But Silicon Valley is as glamorous as it is different in this aspect. In most part of the world where a decent VC-startup ecosystem exists, a VC mostly worries about the exits more than the deal flows.
With my limited experiences in France, the deals do come automatically to the door if you're a VC firm with several hundreds of million euros under management, such as Truffle Capital where I worked for 6 months. What I spotted as the main problem in these pitches, however, is that most of them are life-style startups, namely those that founders created to replace their corporate jobs instead of going for exponential growths. There are also lots of spin-offs from the college labs or big tech firms, which feels like the 90's, except we're now well into the second decade of the new millennium and things that work today rarely come from the aforementioned channels. Among the dozen entrepreneurs that I eventually brought in for an interview at Truffle, only 2 or 3 among them looked like a normal pitch that you would see everyday in Silicon Valley, that were worth further evaluating whether they were good targets for returning the expected 30% IRR with our LP's capital.
Let me jump to the conclusion first: France is very very good in hardware designs.
By good, I mean compared to the non-hardware startups here who are often copycats or service providers exploiting the loopholes in the French bureaucracy and therefore aren't scalable beyond the hexagone border, the hardware startups here are not only capable of designing interesting connected objects but they're also capable to doing it beautifully.
A good example would be Withings, backed by the best VCs in Paris such as Idinvest, Ventech and 360 Capital Partners. It takes but a few looks at their websites to know that they're really good at desigining beautiful objects, but the example I like using the most is the smart watch they announced earlier this year: Withings Activité.
Unlike all other smart watch makers who struggled to cope with the power consumption of an LCD screen, Withings chose to drop the screen entirely and instead designed a beautiful classical watch with all motion sensor capabilities. The sensors then sync up with your smartphones automatically for all recorded data. The result is a beautiful urban-style smart watch with a battery life that can last up to 1 year. Consider that even Tim Cooke admitted that Apple Watch might have to be charged daily, I think Withings really made the smart choice in desiging their smart watch.
And God how beautiful it is!!
And it's not just Withings, who was founded in 2008 and has already had a strong track record over the past couple of years in rolling out wonderful smart devices. To some degree the young hardware startups are even more fascinating, as several of them have successfully won over the Kickstarter sponsors and raised million-dollar rounds on the crowdfunding platform. In other words, while most non-hardware French startups struggle to go beyond the border, the hardware ones are already succeeding in winning over the most passionate backers in the United States!
I will write another article analyzing the status quo of hardware startups given the brand new paradigm introduced by crowdfunding platforms. Here I will just introduce the most exciting hardware startups here in the country of Victor Hugo, Charles Baudelaire and Jean-Paul Sartre.
If there's any GoPro killer, this is it. Giroptic designed a HD video camera, called 360 CAM, that captures video with 3 HD video cameras and stiches them into a 360° video experience. The idea is that for normal camera, both still and video, you only capture the scenes where the cameras are pointed. With 360 CAM, you can capture the entire environment as you walk down the ancient greek stairs or jump from the cliff into the water. The idea is to capture the entire atmosphere, unedited and unframed, so that people have the chance to relive the moment. Their KS campaign has been the most successful for French startups, raising over $1.4M in early July. The company promised to start shipping the products in November.
With the appearance of a chubby USB drive, Lima connects via both Ethernet and USB to provide multiple users access to exactly the same set of files on the cloud across different mobile platforms. The idea looks simple but since the device itself is always hooked up to the Ethernet at your home or office, it's constantly functioning to keep everything synchronized and up-to-date. For users on any device it would just look like a folder, but of unlimited capacity. Lima also allows users to share confidential files in the same manner, but without storing them anywhere on the cloud. The prototype has proven to be so attractive that after they raised $1.2M on Kickstarter in September 2013, they were able to secure a Series A funding of $2.5M from Partech, a reputed VC in Paris. Here we're seeing the staged investment happening for young French entrepreneurs doing smart devices and isn't that exciting? (Disclaimer: Elephants & Ventures partnerd with Lima in July 2013)
Prizm recently launched their KS campaign and quickly exceeded their target of $70,000 within a couple of days. Prizm is basically a wireless music player which intelligently recognizes the people in the room and mix music to be played based on their Spotify profiles. It also takes into account of time, relationships (couples or families) and any other intelligence it could get. It's basically a hardware Spotify without your intervention and seems pretty cool if you like to be surrounded by music all the time!
Keecker is probably the craziest KS campaign I've ever seen, because their unit price is $3,999 – and it's working!! With a goal of $100,000, the campaign currently stands at more than twice that amount and is set to close in two weeks. The reason they could sell at such a high unit price is because they have a really convincing working prototype, as seen in the video below. The walking projector/speaker is smart, allows for remote control and is totally cable-free, therefore lending itself to multiple imaginary usage scenarios. No wonder people are excited to pay the startup ~$4,000 up front in order to receive the cute robot in November, just in time for holiday season! BTW, Liam Boogar of Rude Baguette wrote a great article on this, talking about the potential of crowdfunding platforms as the next retail channel.
Hardware as the Promised Land of French ventures?
At this moment it's hard for me to pinpoint the exact reasons that we're seeing so many interesting hardware startups here in France, while the non-hardware ones have a lower hit rate, at least in my eyes.
If any, my thesis is as follows: the country has enjoyed a great public education system which churns out year after year great engineers and designers. And since France doesn't like talking about money and maximizing wealth, most of the engineers and designers have been happy with what they have had, either within big telecom corporates or in their own home offices. By the time they decide to start their new hardware businesses, they are already fully equipped with the hard skills and also come in with a completely different angle compared to many hardware startups in Silicon Valley. They are not thinking about potential equity compensations at the (still) very distant exits – heck! Most of them probably never heard of the term "exits"! All they want is to build some cool devices that are not available on the consumer electronics market dominated by giants such as Sony, Samsung, Panasonic, Apple, Bosch, etc.
In other words, they're in general closer to the proven hardware startups in Silicon Valley such as Oculus and Nest, more than the rest of the bunch in the Valley that probably would never make it exactly because they're too eager to become the next Oculus and Nest.
And if this is true, then maybe we've found our Promised Land in the startup scene of Hexagone!
Stay tuned for my in-depth analysis on hardware startup dynamics and flows.