This post is an English translation of Scality CEO Jerome Lecat’s letter to President Hollande, written on the occasion of President Hollande’s visit to Silicon Valley.
Born and raised in France, I have been dividing my time between Paris and San Francisco since 1989. In 2006, I established my second startup in Silicon Valley, and I moved here full-time in 2011. I am living the American dream, with a successful professional life, a beautiful family, and exceptional weekend windsurfing.
This letter was hand delivered to François Hollande, President of France, to urge France to move beyond its fears regarding the global economy and create a real “Bridge to Silicon Valley,” as other countries have done.
I since realized that the opportunity described here really benefits both sides of the Atlantic. For France, it can help reduce unemployment, and for Silicon Valley, it can provide access to a highly desirable and much-needed talent pool, which can help reduce the current acute skills shortage that startups and established companies experience.
It is a great honor that you have come to visit us in San Francisco.
Your presence here has been an opportunity for many people to speak out. I have heard some say that it is difficult to be an entrepreneur in France, and others say that my home country has no chance to remain the fifth-largest economy in the world. I do not agree with these views. There are tremendous opportunities for France, provided it picks the right battles.
Scality, the company I run, is the third startup I founded in France, and it will definitely not be the last. In a few years’ time, thanks to French funding, we have been able to become a world leader in data storage infrastructure software, achieving 500 percent growth in 2013. In just a few years, we have come to employ 70 people, two-thirds of whom work in France. Our headcount will grow to 100 by the end of the year.
Ironically, it was our very decision to be in Silicon Valley that enabled us to hire more employees in France. The Silicon Valley ecosystem offers incredible leverage for all companies, whatever their background. Let us help French entrepreneurs gain this leverage, and this will, without fail, lead to more job creation in France.
In Silicon Valley, success attracts success
Ever since Hewlett-Packard put down roots in Palo Alto in 1939, Silicon Valley has nurtured an ecosystem unique in the world for fostering tech innovation. The creation, development, and growth of startups has become a science, to the point that one could call Silicon Valley a “startup factory.” Successful startups can quickly turn into large companies. Silicon Valley is now home to 20 of the 500 largest corporations in America. A Stanford University study found that the 18,000 companies created by its graduates have created 5.4 million jobs. GDP in the San Francisco Bay Area is $535 billion, 20 percent of France’s GDP, in a region that was almost barren one century ago. Not only does Silicon Valley create jobs, but good jobs. A UC Berkeley study revealed that for every job created in high tech, 4.3 related jobs are also created, and the average annual salary across the Bay Area is $65,000, 40 percent higher than France’s average!
The uniqueness of Silicon Valley lies in its ecosystem, which functions as a complete, self-reinforcing network: Universities, entrepreneurs, engineers, venture capitalists, bankers, lawyers and marketing agencies all cooperate and contribute to its success.
The sheer magnitude of this startup factory is difficult to comprehend. Here, it seems like everyone is thinking hard about how to change the world. Everyone has built or worked for a startup or has one in the making. Daily, we rub elbows with companies that might acquire us, and with companies that have enabled their engineers to earn millions of dollars. When Google, Facebook and Twitter had their IPOs, each created more than 1,000 millionaires. Together, these three initial public offerings generated over $10 billion in tax revenues.
Such is the power of stock options: Success and the wealth created is very widely shared and is often used to provide seed capital for the next generation of startups.
There is another factor driving success in Silicon Valley: risk-taking. With each new wave of technology, the playing field is leveled again. Many startups from around the world compete to lead the new technology wave, while incumbents, the successful companies from the previous cycle of innovation, struggle to defend their position. Wave after wave, Silicon Valley emerges all the stronger each time.
Here, one finds a culture of risk-taking, not only for startup founders and employees but also for venture capital firms as well as law firms and recruiters, many of whom also receive compensation that is based in part on stock options. Provided it can articulate how the company will dominate this next market transition, a startup will secure funding for growth, even when a proposal is fairly risky. While only a handful will achieve a billion dollar valuation, predictably, again and again, some surely will. These successes are certainly enough to make the virtuous cycle create significant value for investors, entrepreneurs, employees, and ecosystem more broadly.
We founded Scality in France, and our decision to move the entire management team to Silicon Valley was made not because we wanted to leave France, or even gain customers in the United States, but because we wanted to become part of the ecosystem here, and enjoy the benefit of the ideas that permeate this environment. We are following in the steps of our predecessors, Bernard Liautaud and Denis Payre who, with Partech funding, made the “Silicon Valley leap,” and became the first French company (Business Objects) to be listed on NASDAQ.
Silicon Valley really works like an accelerator, and people are willing to travel a long way to become part of the Valley. We see this happen frequently with entrepreneurs from India, Israel … and France.
France: A good ecosystem for startups
Over the last 30 years, France has built many programs to foster entrepreneurship, in particular in the high tech sector. The tax exemption granted for investments in tech startups, such as the FCPI (Innovation Mutual Fund) and FIP ISF funds, serves to encourage startup financing. Year after year, La Caisse des Dépôts and now BPI have been pillars of these kinds of investment in innovation. France ranks number two in Europe when it comes to investment in venture capital, second only to England and ahead of Germany.
Beyond financing, France also produces some of the world’s top high tech engineers, through its Grandes Ecoles, but also through its specialized schools such as EPITA, or the future “42.” Engineers benefit from outstanding scientific training, demonstrate some of the best analytical thinking in the world, and have what seems like an innate desire to innovate. And for these reasons, France excels in science and technology fields as diverse as aeronautics, nuclear engineering, medicine, banking, civil engineering, and software engineering
Thanks to the Research Tax Credit (Crédit d’Impôt Recherche, CIR), R&D engineers in France cost half as much as they do in Silicon Valley. While Silicon Valley is certainly the world’s hub for technology innovation, Google, Facebook and others like them will go to virtually any length to recruit the best engineers. In many areas, France’s engineers are at the top of their fields, as is evidenced by the strong French technology community right here in Silicon Valley.
I would like to pay special tribute to La French Tech, the initiative launched by Fleur Pellerin a few weeks ago. Amidst the general doom and gloom that one senses in France these days, it is invigorating to hear someone highlight positive dynamics that are, indeed, working.
Barriers to development
There are two ways to develop a successful company: Bootstrap, as my father and, before him, my grandfather did, being profitable from day one; or grow like Cisco, Apple, Google, or Facebook and, on the French side, like Business Objects, Neolane, or Criteo did, through a substantial forward investment required to grow and secure a position of global leadership.
In this second method, sustained profitability occurs only after market leadership has been firmly established. Both approaches have their merits; the second carries greater risk, but when it works, it holds the promise of greater return on investment. It is usually the only option in high-tech, where technology cycles are short. A tech startup has an average of 5 to 7 years to establish itself as a leader. After that point, it will likely have been outpaced.
A study by TechCrunch, one of the leading websites covering the Silicon Valley startup community, demonstrated a high correlation between a startup’s ultimate long-term value and its level of investment financing.
Unfortunately, in France, this kind of risk-taking is counter-intuitive.
In contrast to Silicon Valley, French VCs tend to under-finance their startups. This creates a vicious cycle: Under-financed startups are overtaken by the competition and sold at “fire sale” prices.
However, startups that manage to attain global leadership, demonstrating not only technology leadership, but also market leadership, often create significant value via an IPO, or if not, are sold at a large premium, in either case, creating wealth. Profits from high-value exits are often reinvested in another round of new companies. Such is the virtuous circle of Silicon Valley.
This does not mean, of course, that startups should be profligate and foolish in spending their cash, as was too often the case in the late 1990s. Indeed, one of the strengths of French startups is to be capital efficient at technology development, requiring much less capital than typical American startups. Nevertheless, beyond the technology development phase, once the product and market validation have been completed in France, it is important that the company expand its business quickly. This kind of market development is often costly and requires growth capital. Thus, it is absolutely essential to invest significantly in emerging companies, in order to give them a chance of becoming global leaders.
The “de minimis” principle, which limits total FCPI investments to €2 million per year, does not make sense.
For venture capitalists to continue financing startups, it is essential that they realize a profit from their existing investments. This in turn, requires that startups return capital to investors, either by being sold to a larger company, or through an IPO. This second exit option requires much more money, typically four times as much. But as public companies remain independent, they are far more likely to retain their core values and control over their own destiny, and, as a result, be more likely to keep jobs in France.
Ironically, another barrier to development is created by many grants that are too complex to implement.
I have come across startups that turned into bounty hunters, living from grant to grant, from OSEO to ANRT, not to mention export premiums and grants from the EU. These companies seem to spend all of their time writing grant applications, sometimes even changing their business and technology plans to fit grant programs rather than experiment and work with real customers in real markets. No sustainable job creation can come from one-off grants, as generous as they might be.
It would be far more helpful to increase the CIR program, incentivize venture capital funds to increase their investment and re-focus companies on developing their technology and discovering their markets. There is very little grant-making in Silicon Valley, but this is not an obstacle to building valuable companies. Indeed, quite the contrary is true. The only way for entrepreneurs to build sustainable companies is precisely by creating value for their customers.
The fourth barrier to the development of startups in France is probably the most difficult to overcome: the lack of alignment between French labor law and the business pace and constraints of startups.
In identifying labor law as an issue, I am not referring to social security charges. Rather, the cost of labor needs to be considered as a whole, and as I was suggesting earlier, an engineer in France costs half as much as one in Silicon Valley. One of the forces driving Silicon Valley is risk-taking and, in order to succeed, people must be allowed to make mistakes. Most startups, even the greatest success stories, often go through difficult times.
Twice in my career, I have had to make the decision to let 40 percent of my staff go, in order to save the company, making it possible to maintain 60 percent of the employees and start afresh, on sounder footing, and begin hiring again a within a few months. In the United States, this is possible. In France, the cost of a redundancy plan is so high that the only option is to file for bankruptcy. Even without reaching such extremes, while R&D in France is extremely cost efficient, the same is not true for customer services. It takes a significantly larger workforce in France than in the United States to provide 24/7 support, the norm in today’s global digital economy.
Building a bridge between Silicon Valley and France
There is a two-fold opportunity for France, which I believe deserves more attention. First, like Business Objects, Criteo, and Scality, French startups should be encouraged to establish a corporate presence in Silicon Valley, while maintaining Research & Development in France. Second, Silicon Valley companies should be invited to build research & development centers in France. Other countries, in particular, India, Israel, and Ireland, have already realized the value of maintaining cross-border operations both in their home country and in Silicon Valley, in exactly this fashion.
France is an excellent breeding ground for startups. Financing is relatively easy to find, and contrary to popular belief, the cost of labor is relatively low for companies with high added-value, like ours. France itself is a market large enough to enable product and market concepts to be validated at home.
However, after the validation stage, our up-and-coming companies should plan to establish themselves at the heart of whatever ecosystem is best-suited to their long-term growth. In the high tech sector, this usually means Silicon Valley. Scality’s growth, and thus the number of jobs we create in France, has accelerated considerably since Menlo Venture led our last round of financing. This has not only been the result of the funds invested, as our French investors were ready to support our ongoing development, too. It was, rather, a matter of frame of mind, and because, once we had a leading American investor, we were welcomed into the Valley’s ecosystem.
To illustrate, it was almost impossible for us to hire the best people before we had a strong local reference. In contrast, as soon as Menlo Ventures signed on, employees from Facebook, Google, Amazon, and Apple spontaneously came knocking at our door. Through their extensive networks, Menlo Ventures is introducing Scality to some of America’s top corporations.
While Menlo Ventures has brought Scality many benefits, our partnership is two-way, and Scality has opened the world of French high technology to Menlo. Menlo Ventures, founded in 1976, is one of the top 25 American venture capital firms. But it had never invested in France prior to its investment in Scality. After its investment, it came to realize just how productive R&D is in France and is now looking for other potential French investments. France has world-class engineering talent, and with CIR, we have a real chance to turn France into an employment center providing the top-tier engineering skills needed by the digital economy of the Third Millennium.
Only one shadow looms over this otherwise picture-perfect scene, and it brings me to my main request. France suffers from a terrible image problem regarding labor law, so much so that many American investors are opposed to hiring any teams in France. During our recent fund-raising process, I knocked on the doors of more than 80 venture capitalists in Silicon Valley. Almost 20 of them, who were initially interested in investing, shut their doors when I disclosed that our R&D is and would remain in France.
It is not the “R&D-abroad model” they rejected — Israeli and Indian startups are widely praised for exactly this model — but, rather, the fact that our team is in France. Only Menlo Ventures took the time to listen to the reasons behind our decision, and decided to invest in Scality. It is true that French labor law is ill-suited to startups, but less than observers think.
For this reason, I feel it is essential that France, in order to enjoy the benefits of the Silicon Valley accelerator, communicate very broadly with American investment funds in order to dispel the popular, but false, image of French labor practices and counter this by showcasing what France has to offer.
French entrepreneurs established here, along with investment funds such as Partech, idinvest, and Iris, have already begun the hard, daily work needed to change perceptions. Let us help them in this effort, by providing institutional support. This should be a key focus for La French Tech.
Jérôme Lecat is the CEO and founder of Scality.