This article was written by Philippe Botteri, a partner at Accel, based in London. Philippe is a Board member and/or an investor in companies like BlaBlaCar, DocuSign, Algolia, CrowdStrike, Qubit and PeopleDoc.
The French ecosystem has boomed for the past five years, proving its ability to generate “unicorns” like Criteo, Showroomprive and Blablacar. On its heals are is next wave of fast-growing and disruptive startups like Peopledoc, Withings, Algolia, Doctolib, Food Assembly and Sigfox.
Accel has been at the forefront of these waves – in the past few years, we have deployed more than $130 million into companies like Showroomprive, Blablacar, Peopledoc, Doctolib and Algolia. We don't intend to slow down.
However, with growth comes pain, and France’s reputation for accommodating the startup economy has had its ups and downs. It's important to study the successes to better understand how we can create a climate for more startups to follow suit. We can acknowledge and appreciate that government’s push for reform that benefits startups, but must continue to push harder and with the purpose of creating jobs and lasting companies.
We can do this by identifying important themes that serve as a framework, and use comparative benchmarks from other countries that have undergone similar growth pains in the past. We identified four themes, which each suggests an opportunity to reduce complexity and increase agility for young startups:
- Limiting the burden of social charges
- Enabling startups to attract foreign talents
- Reducing the burden of regulatory compliance
- Send a strong PR message to the Tech and investor community
Let’s explore each in detail:
1. Limit the burden of social charges for startups
European founders can start a company in dozens of countries, so it’s important that France make it easy on founders by removing the burden of social charges (taxes). These charges can be modified to help companies get off the ground and create jobs faster, while making France more competitive and attractive for foreign investors and founders.
This can be accomplished by capping social charges for unprofitable companies in their first 10 years. Lowering mandated charges mean that startups would be incentivized to hire more people when things are going well, and layoff less people in downturns without premature repercussive costs.
Examples from other countries: Russia reduced IT companies’ social contributions from 30% to 14% until the end of year 2017.
2. Enable startups to attract foreign talent
Access to talent is one of the most important elements of success for young tech startups. French startups regularly struggle to attract necessary foreign sales, marketing and product talent. A few measures that could help (each of the following are suggested for startups less-than 10 years old):
- Cap the income tax at 25% for foreigners during their first 5-6 years in France – the typical duration of a position in a startup. Extend the rule to French people who want to come back to France after having not worked/resided in France for the past five years.
Examples from other countries: Spain’s “Beckham Law” explains that foreign nationals coming to work in Spain may apply to be taxed as non-residents. At the time of enactment, the tax rate was set at around 24%, instead of the average income tax rate which was around 43%.
The Netherlands special tax regime for expatriates entitles them to a tax-free cost reimbursement of 30% of the salary (with some technical adjustments). The employee is then, in essence, no longer entitled to separate general tax-free reimbursement of expenses, in relation to the assignment to the Netherlands.
- Lower social charges for foreigners joining a startup. This will help fill the salary gap between the average French income compared to that earned in the US and UK. This measure could also be extended to French nationals who are returning to France after five years away (limit exemption to several years following their return).
- Create a visa with express application for foreigners working at startups. Time is critical for young companies, and introducing express visas would reduce hiring friction
Examples from other countries: In the Netherlands, a new immigration law offers new visas for startup founders from non-EU countries. A prerequisite, however, is that the startup must be guided by an experienced mentor who is based in the Netherlands. Within a year, the startup entrepreneur can develop a sustainable a business based on an innovative product or service under the guidance of the experienced mentor.
3. Reduce burden of regulatory compliance for young companies
One size does not fit all. Startups should not face the same taxes as establish companies – in doing so, startups face great barriers to growth because of costly legal fees and regulatory compliance. Here are a few suggestions that would help reduce this burden:
- Unions and employee representations: while these representations are important for larger companies, they are not designed for startups and are a real burden for founders. Laws should be modified to account for the unique challenges and dynamics of early stage companies. For example, the law could specify that companies require forma work councils (unions) after the first five years of incorporation.
- Standard lay-off package: layoffs are unfortunate, but when mandatory, French entrepreneurs and foreign investors face a lengthy process with uncertain outcomes. For startups, this complexity may make the difference between life and death as a few months of cash runway means everything. Startups should have the ability to layoff people with a standard package of three-months salary without further negotiation (similar to the US and UK). Limit this to companies that are less than 10 year old and unprofitable.
4. Send a strong PR message about a new laws favoring startups
France is known abroad for the 35-hour week and its proposed 75% tax rate (fortunately considered unconstitutional). It is time for France to proactively change its image and promote a startup and investor-friendly economy, with supporting laws and regulations.
The government has made tremendous strides in its thinking about startups, and I look forward to continuing to work on these initiatives to improve the competitiveness of the French ecosystem, while enabling startups to reach escape velocity much faster!