The other day I had lunch with an independent pan-European venture fund that I really admire.  They’re based in a modest country but invest all over Europe, and I would consider them to be among the top pro’s of true venture capital investing in Europe.  While they had made a number of investments in the past in France, they no longer prioritize the market here, and I can understand their rationale.

France undoubtedly boasts some outstanding engineering talent.  Even better, the entrepreneurial spirit, especially among the new generation of developers, has progressed exponentially over the past ten years.

However, the French VC market has become the epitome of the cliché of “too much money chasing too few deals”.

The French state plays both an indirect and a direct role in all this.  Indirectly, the government encourages capital flows into venture funds via its extremely generous tax incentives, both on income and on wealth taxes.  The proliferation of “Loi-Tepa”-inspired funds is one of the main reasons that we curtail our investing during the “Easy-Money Period” each spring.

Now the French state will double-down on its direct impact in VC.  Building on its flush Fonds Stratégique d’Investissement, the state-sponsored investment vehicle CDC Entreprises has announced a €400 million digital ventures fund (as part of the government’s €1.4b National Endowment for the Digital Society, “FSN”).  Known as FSN PME, the fund will invest up to €10m in early-stage companies, with the aim to make 30 investments by the end of 2011.

30 investments within the next 6 months.  Wow !

To its credit, the government seems to be fulfilling its primary objective, which is job creation.  While job creation is certainly a welcome by-product of VC investing, an independent venture fund’s true north is capital gains generation.  Both are noteworthy aims, but giving priority to one can hamper the other.