All in + France

However, unlike some VCs who chose to move to Silicon Valley to gain that prestigious postal address – or to Sand Hill Road if they really really desire to feed the fat belly of the landlords – we were born here in Paris. We have been feeding our energy to and getting fed with the energy from the Parisian hardware entrepreneurs for roughly 3 years. We were not follower but rather witness and contributor to this renaissance that's spelled in French. Even though now we diversify to global deals, we continue to see great startups with potential coming out of France – the deals obviously flow to us by default these days. With the right execution and the right investors, they have every bit as high a chance to become the next Nest, GoPro or Fitbit.

Therefore, I feel the question "Why France?", though kind of a passé within our firm, is definitely worth a explanation, for the sake of the foreign VCs that are puzzled by this phenomenon as well as our EMS and retail partners around the world.

And if this execution can be achieved, then the investment question about whether they would be able to generate a long-term revenue stream from rolling out newer and better polaroid cases or make money from (re-)selling the special polaroid papers becomes sort of irrelevant.

By archiving and safe-keeping the precious memories of their royal customers, Prynt will be able to fend off competitors who attempt to roll out potentially better and cheaper polaroid cases and avoid competing with grey market papers.

That'd then put them in the GoPro realm of intouchabilité, which is exactly why we chose to invest in Prynt when we met the team last year!

Finally the most important structural development for hardware startups – the emerging of Kickstarter as a first huge funding source. In the old days, the HW startups have to raise money from investors to produce their prototypes and first batch of products. Since this usage of capital is relatively inefficient, the money they raise will take up equities of 30~40%, if not more. Later when the startups go on to raise the next round, the new investors will simply take a look at the Cap Tables and walk away. It's simply not gonna meet their required rate of return. However, today the greatest hardware startups raise their first big round of money for production from their end customers! There is zero equity dilution. Even more beautiful – this is the reverse of the receivables-payables mismatch! While lean SaaS startups have negative working capital, these HW startups have positive working capital for their first phase of mass production!! Consumers are paying in full way in advance – anywhere from 6 months to 18 months – to buy the products that excite them. The startups can then use the money to learn operations and logistics through their first mass production. At the same time, Series A investors look at the Cap Tables and now it has become an investable business. In short, the emerging of Kickstarter has delayed the equity dilution by an entire round and peeled away considerable investment risks, making investments in hardware startups interesting again.

Again, let's go back to the highly simplified Gordon Growth Model. Assuming a certain startup has a discount rate of 30% to reflect all kinds of risks. For Gordon Growth Model to work, we have to assume that the startup is already generating positive free cash flow (FCF) from its operations. This is apparently not true for startups but I'm simplifying the calculation here so that you could see the impact of the growths, which will have similar impacts with a full DCF valuation where most of the value for a promising startup comes from after Year 7~10.

Now assume that this startup generate $10M FCF for this year. In the two following growth scenarios it will have such valuations:

  • Growth of 10%: Valuation = $10M*(1+10%)/(30%-10%) = $55M
  • Growth of 20%: Valuation = $10M*(1+20%)/(30%-20%) = $120M

Note how sensitive valuation is to growth rate: a doubling of growth from 10% to 20% gives $65M more paper value to the entrepreneurs here. It goes without saying that it's much easier to generate such a growth figure of 20% in a country where the macro is growing 7% compared to 3%.

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. My thesis is as follows: the country has enjoyed a great public education system which churn out years after years great engineers and designers. And since France doesn't like talking about money and maximizing wealth, most of the engineers and designers are happy with what they have, either in a big corporate or in their own home office. That means maybe by the time they decide to start their new hardware businesses, they have a completely different angle compared to the hardware startups in Silicon Valley. They are not thinking about potential equity compensation at a (still) very distant exit – heck! Most of them probably never heard of the term "exits"! – and they just want to build some cool devices that are not available on the market dominated by giants such as Sony, Samsung, Panasonic, 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 that probably would never make it because they're too Silicon Valley type.

Due to the capital control of Government of China, historically money flowing out of China was stigmatized as rich people moving their money of dubious origin to developed countries or tax havens. But over the past few years things have been changing.

While oversea investments by giant corporates in China are no news at all, we're now seeing Chinese funds, piles of cash in hand, seeking exposures to geographies other than their own country. It's probably inspired by the expected slow down of GDP growth, the discussion of which had first surfaced a couple of years back and is now a fact. More importantly, I believe as the investment environment in China become more and more mature, geographical diversification becomes one of the objectives for the super big funds especially. While it might have already happened in mutual funds, now the Private Equity people are also extending their reach west-ward.