It’s of course important to take award competitions with a grain of salt. Still, I am proud to be an investor in finalists in two different categories of the 2013 Mobile Entertainment Awards.
It’s of course important to take award competitions with a grain of salt. Still, I am proud to be an investor in finalists in two different categories of the 2013 Mobile Entertainment Awards.
Setting aside the Yahoo/DailyMotion debacle for a moment (which I fear will carry disastrous long-term consequences for cross-border m&a, one of the three ‘arrows’), I’d like to address a second arrow which is the lack of a viable public market on which to IPO a tech company in France. The general feeling among performance-focused VCs in France is that the public markets do not represent an adequate avenue for sustained financing and liquidity potential.
Let me clarify a few terms I’ve chosen deliberately in that last sentence. First, I’m specifically referring to VC-backed firms – in other words tech startups (be they ICT, life science, or energy) that received financing at an early stage and prioritized revenue acceleration over profitability. By performance-focused VCs, I mean those investors whose sole objective is capital gains generation, as opposed to those for whom recurring management fees represent a significant wealth creator. Finally, by sustained financing and liquidity potential, I mean a market that, beyond the initial fundraising from the introduction (however successful), allows a listed company to leverage its quoted status for further benefit (for example, future m&a, exits for the VCs and early founders, etc.).
A stock market’s inability to provide sustained financing and liquidity potential to its listed companies is the consequence of low trading volumes on the listed companies’ shares. For small albeit growing French tech firms aspiring to go public, the most likely exchange for which they are eligible is the Paris Alternext. Opened in 2005, the Alternext was created with the very objective of serving as an alternative route for SMEs that may lack the necessary resources needed to satisfy the requirements of a regulated market like the Eurolist (now NYSE Euronext). The Alternext exchange currently hosts approximately 200 companies. For a company to go public on the Alternext, it must meet the following requirements, which as you’ll notice are relatively light:
So I was curious to see if actual evidence corroborated this feeling of inadequate liquidity on the Alternext. I examined the trading volumes of Alternext companies and compared them with those of a market that is arguably the gold standard in tech stocks: the Nasdaq. I expected that Nasdaq stocks would surpass Alternext stocks in trading volumes but never fathomed the magnitude of the difference. The disparity was overwhelming and incontrovertible. Tech stocks listed on the Nasdaq have trading volumes (in value terms) that are 5000 ~ 7000 times higher than tech stocks on the Alternext. And no matter how you slice it. Take Nasdaq’s highest dollar volume stock, Apple, and its volume exceeds the Alternext’s leader by 5600 times. If we take an average of the top 10 and the top 25 on each exchange, Nasdaq’s dollar trading volume is 6600 and 7200 times higher, respectively, than those on the Alternext (many thanks to Nilanjan Basu who worked all weekend crunching this data).
In other words, the evidence supports the general feeling among French VCs that the Alternext does not provide sufficient liquidity potential. Incidentally, the analysis for the Eurolist B & C companies supports a similar conclusion, however these exchanges are less focused on tech stocks than the Alternext.
One ray of good news in this analysis is that one sector stands out as possessing relatively high trading volumes on the Alternext: the life science sector. Although life science companies represent only about 1/3 of the Alternext listings, last month they accounted for over 70% of the trading volumes in value terms. (By contrast, ICT firms only had about 16% trading volumes, despite the fact that they are nearly equally represented on the Alternext). Four of the top six and six of the top ten volume capitalization firms on the Alternext last month were life science companies. So one could argue that the Alternext is more or less functioning properly for the life science sector.
In a future post I’ll explore why this may be case…
On Friday my colleague and I walked by a shop window at lunchtime that displayed a large flat screen televising Roger Federer’s match at Roland Garros. We were immediately struck by the abundance of vacant seats in the stadium during the match.
Granted, it was a Friday afternoon (heaven forbid the French cut out work early on a Friday in May), it’s still the early stages at the French Open, and perhaps most importantly a Paris afternoon without rain is a risky bet this year. But come on, on the court was Roger Federer. The 17-time Grand Slam victor, the winningest player in professional tennis history, a living legend and class act in the sport.
Tickets were practically sold out for the whole tournament, and yet half the seats at Philippe Chatrier court remained empty from no-shows on Friday’s Federer/Benneteau match. I suspect that most of the empty seats were those held by tournament ticket holders, people or companies that plunked down the full 7k€ per seat with hospitality suite access.
But for all those people who don’t have the luxury of attending the French Open at will, for those who may not have the resources to afford entry tickets, let alone box seats, or have access to the manicured clay/grass/hard courts of the various opulent private tennis clubs dotting the Paris region… for those aspiring families in the 93 who see clips of Federer on tv and can only dream of sending their children to a tennis lesson, no less to a prestigious Bollettieri-like training camp… I’m thinking of you.
So Roland Garros, I have a modest proposal. In this age of the sharing economy, and in the spirit of collaborative consumption, why not open up the seats that are abandoned by the no-shows ? The first step could be simply providing a platform that allows ticketholders to voluntarily donate their unused tickets to the cause, in other words, an opt-in system that doesn’t inconvenience anyone. The seats are then offered without charge to the next person on a special privileged waiting list. Coordination and screening of the privileged waiting list could be delegated to a trustworthy organization experienced with underprivileged communities, such as the fine folks over at Ashoka.
Maybe I’m too idealistic, and there will undoubtedly be a variety of objections to overcome the initial static friction to implement something like this. I mean, you cannot even buy French Open merchandise on site at Roland Garros without holding a paid ticket.
But hey, sometimes you have to ask the naive questions. Who knows, this might uncover the next Yannick Noah.
There has been a lot of gnashing of teeth recently about Apple’s alleged dodging of paying taxes on tens of billions of profits from 2009~2012. Incidentally, that’s merely what the U.S. government deems it forfeited. Apple of course pays a paltry tax bill in France, despite the fact the France remains the world’s third best market in sales of iOS devices.
“Apple, champion du monde de l’évasion fiscale?” questioned Hervé Nathan in Marianne. Indeed, Apple’s complex contortions to reduce its tax bill give grounds for outrage: Apple owns a subsidiary called Apple Operations International, an Ireland-based shell company that is not registered in the U.S., thus avoiding U.S. tax liability. Furthermore, this Irish subsidiary is exempt from Irish taxation, too, on the basis that it’s not managed in Ireland. This setup, combined with an accounting technique called accelerated depreciation, renders profits in Apple Operations International totally tax free (and profits of this shell reached almost $30 billion over the four-year period). Sound complicated ? Here’s a parody video that explains it.
Yes, it’s revolting that corporations like Apple can afford the expertise and geographic flexibility to seemingly dodge a significant chunk of taxes. Even more revolting is the list compiled by Citizens for Tax Justice of 26 major American companies that paid no taxes whatsoever from 2008 to 2011, including firms like Boeing, GE, and Verizon. U.S. Senator Carl Levin notes that the average American public company pays an effective income tax rate of just 15%, well below the statutory rate of 35%.
My relationship with Apple is multi-faceted: I’m a shareholder; I’m a customer of its products; and I’m a citizen of two countries arguably losing out on tax revenues. As a shareholder, Apple’s tax optimization is beneficial to me: lower taxes leads to higher free cash flow, which leads to a higher share price.
As a customer, my benefits are less clear. In theory, an Apple with more cash in its pocket will produce better products that improve my life. However, it’s not evident that Apple passes on its tax savings directly to the consumer. As The Onion quipped in response to the news of Apple’s tax dodge, “That must be how they keep their prices so low.”
Finally, as a citizen and taxpayer, I’m indirectly but undisputedly harmed by these fiscal loopholes that reduce the tax receipts of my indebted governments.
To the first question, I would argue yes. Apple CEO Tim Cook claims his company did nothing illegal, which is probably true. Similarly, while under criticism in the UK, Eric Schmidt described Google’s approach to tax optimization as ‘just capitalism’.
And these comments point to the core of the challenge of closing these corporate tax loopholes. While these tax schemes are despicable, Apple and Google are merely playing within the rules of the game to optimize shareholder value. Indeed, Schmidt is right that, for better or worse, capitalism requires him, in fact obliges him with a fiduciary duty, to maximize shareholder value.
As Sarah Gordon at the FT points out, companies should be run for the benefit of their shareholders and other stakeholders. They are not tasked with looking after the common good – that is government’s job. So while the corporate tax contortions represent the proximate causes of forfeited tax revenues for deeply-indebted government coffers, the ultimate cause lies with the politicians that set the laws. Apple’s actions demonstrate the unfairness of the tax code.
Unfortunately, resolving the hopeless complexity of the tax code is no simple feat. Suggestions abound, albeit each are complicated. In the meantime, perhaps the most effective techniques are corporate boycotts, such as the recent mass consumer migration from Starbucks to competitor Costa Coffee in the UK.
In the sequel to my fantastic experience at last year’s Triathlon du Sud, my expectations were high, albeit the new location represented an unknown variable. The sudden freezing downpour just prior to the race start (no fault of the race organizers), combined with the poorly-marked bike course on narrow roads open to traffic unfortunately rendered this year’s event a slight disappointment. A pleasant swim and a hilly trail run with breathtaking views redeemed it, however, so this triathlon remains on my list for a perennial visit. Hats off to the triathlete next me who finished in the top 30 for his first competitive triathlon !
As I have crowed many times in this space before, Japan is demonstrating renewed energy and enthusiasm in the tech sector. Mobile gaming giants like Gree and DeNA, explosive social networks like Line, and e-commerce leaders like Rakuten, are inspiring success stories for France which recently began venturing abroad.
Now Japan’s overall economy seems to be following suit. This week’s Economist offers a fantastic assessment on Japan’s sudden rebound. Only The Economist could link references to Superman, Soapland, and a Scarlett Johansson / Bill Murray film in a macroeconomic report and keep a straight face.
With a cover of Prime Minister Abe in superhero flight, the series recounts Japan’s economic awakening since the last elections: a galloping stock market, GDP growth of 3.5%, $100 billion in stimulus, an export-boosting currency devaluation, adherence to the Trans-Pacific Partnership espousing free trade, and more.
Given the Bank of Japan’s deliberate policy toward inflation, it’s no wonder that the U.S. government complains about currency manipulation, nor that many investors like Mark Cuban have made a massive short bet on the yen.
For a variety of reasons, I have a strong personal affinity for Japan. Yet beyond personal attachments, I believe the country’s renewed tech sector offers a ton of inspiration for France.
Let’s start with mobile gaming. Platform companies Gree and DeNA have become household names in Japan and are increasingly looking internationally. Both firms have cracked the nut of freemium, with revenues of $422m and $567m respectively per quarter, profit margins exceeding 30%, and ARPU figures that put Zynga to shame, even at its peak (don’t miss Tom Limongello’s piece on the Japanese art of monetization).
Meanwhile, GungHo, the developer of the jawdroppingly successful mobile game Puzzles & Dragons, generated $113m in April alone and now boasts a market cap that exceeds Gree, DeNA, and Zynga combined (surpassing Nintendo even).
Take a related topic which I submit poses tremendous potential: HTML5. Japan’s Docomo embraces this new standard, throwing its weight behind new O/S Tizen and Buongiorno’s efforts here. KDDI Mugen Labo, the tech incubator by Japan’s second largest telco, has set up a special application category for HTML5-engineering startups.
With an eye toward building a global leader in e-commerce, in 2010 Rakuten CEO Hiroshi Mikitani embarked on a program of global m&a (including among several the acquisition of PriceMinister). And one day Mikitani unleashed an edict of “Englishnization”, suddenly requiring all company business to be conducted in English.
And it’s not just the proven success stories that are looking abroad. Many seed-stage firms in Japan exhibit global ambition from the start (this great post from SD Japan zooms in on five of them).
More generally, take design. The same simplicity principles of wabasabi that so inspire Jack Dorsey lend themselves to the design of user interfaces on some of France’s best consumer tech: mobile apps like Bankin, or hardware like Invoxia’s voip console. There still exist too few examples like this in France, though I am encouraged by the upcoming generation of French entrepreneurs with global aspirations and audaciousness in mind at inception. Hopefully both the government and financing sector will catch up.
A word of caution, of course: Japan’s growth trajectory will probably not be full-ahead, full-time, and witness a 70% stock market rise every 6 months. There will likely be some throttling. The weakening yen may dampen the lofty valuations of foreign acquisitions. Already Gree is retrenching a bit from its international adventures in China. What matters is the long-term trend. And right now, the fundamentals look positive.
In an interconnected world, insularity leads to economic ruin, wrote Mikitani in his new book.
Yeah, I’d say France could draw a lesson or two from Japan.
Exactly ten days ago the yearly ritual of ‘Woodstock for Capitalists’ took place. Also known as the annual shareholders meeting of Berkshire Hathaway, this may well represent the only public company’s shareholders meeting whose promise of attendance can be the sole reason for investors to purchase a share of its stock. Of course, another reason is the unparalleled financial performance of the company led by arguably the greatest investors of all time: Charlie Munger and Warren Buffet.
I enjoy reading Buffet’s yearly letter to shareholders in introduction of BRK’s annual report. And while I’m still sifting through some of the euphoria of the shareholder meeting for his customary pearls of wisdom, one gem struck me as particularly relevant for stakeholders in the current state of France’s VC market, to paraphrase Buffet:
If consumers try to invest in every product pitched to them, they will do very well for their money manager and not very well for themselves.
French taxpayers tempted to blindly plow their savings into tax-optimization products, I’m thinking of you. Undoubtedly due to a burdensome fiscal environment, France boasts one of the largest and most developed industries of tax advisory intermediaries in Europe. For anyone owing income or wealth tax in France, a panoply of financial products exists to help them reduce the tax bill: charities, support for the arts, overseas territory investments, real estate schemes, and even tech VC funds. I’ve already written extensively about this last option – so-called retail VC funds – so I won’t rehash all the gory details.
However, I believe that we have entered a phase where many of these retail funds have become Zombie VCs. Danielle Morill wrote a trenchant piece on Zombie VC funds, complete with warnings for startups and even a list of candidates for the zombie status. I also recommend Fred Destin’s follow-up to this piece with his handy guidelines for entrepreneurs to spot an active VC firm.
Beyond the relevance for startups raising money, in France a wariness of zombie VCs is also relevant for taxpayers considering investing in such a fund.
Danielle and Fred explain it eloquently (and these recent pieces in The Economist and the FT add some additional color, or should I say pallor?). But in a nutshell, a zombie VC is a fund that has stopped or severely curtailed the lifeblood of its business: investing in startups promising high potential, and culling those that don’t, all in the pursuit of financial performance.
When a VC runs out of money, it of course can no longer invest in new companies. Often those entering zombie status will preserve their remaining funds to support their existing portfolio.
The nature of France’s retail VC model, however, makes the onset of zombie status particularly acute. First, retail VC funds operate on a yearly, even semi-annual, fundraising cycle (whereas conventional institutional VCs raise larger funds on average every 5~7 years). The precipitous decline in retail VC fundraising (due largely to fiscal changes discussed here), combined with the economic downturn, has suddenly thrust the majority of France’s VC sector into risk of zombie status.
To make matters worse, a French retail VC zombie has little incentive to cull the underperformers in their portfolio. Better to keep such firms on drip financing status, just alive enough to justify continued billing of management fees to the funds’ investors (once a portfolio firm is written off, the VC can no longer charge management fees on that asset). The result is the creation of a class of Zombie Startups and a huge disservice to the funds’ investors who are paying fees to someone to throw good money after bad.
As the FT points out, “The problem with these ‘zombie’ funds is that if nothing is happening with a private equity fund, the very concept of charging a 1.5% to 2% fee for managing it deserves to be challenged.” (2.5% to 4% in France, by the way).
Taxpayers: do your research before sticking your necks out.