2.2.1.1. Definition

A young innovative company (in French, jeune entreprise innovante, or JEI), commonly called a start-up, is defined by Steve Blank as “a temporary organization in search of an industrializable business model that allows exponential growth” (Le Shift 2017). Eric Ries, author of the book The Lean Start-up, defines it as “a human institution designed to create a new product or service under conditions of extreme uncertainty” (Ries 2011). According to a public report by the Commissariat Général du Plan (2003), young innovative companies are “characterized by radical product innovations (more rarely processes) within a rich technological heritage, and develop close links with research.”

Start-ups in France have a specific legal status. However, in addition to this detail, they have very specific characteristics that distinguish them from the usual small businesses.

The first difference between a start-up and a traditional small company is that the latter already has a well-established managerial model, or business model, and is content to follow it. For its part, the young innovative company is looking for a managerial model to follow. The objective of the young traditional company is therefore to execute a predefined model, while the JEI is organized to find one. By definition, a young innovative company sets up an innovation and seeks to market a product or service that does not exist on the market. As a result, it must find the appropriate management model without identically reproducing an existing model. The young innovative company therefore seeks to be innovative.

Unlike traditional small companies, start-ups are looking for added value. In other words, the young innovative company does not aim to remain a start-up but is destined to develop and generate profits.

2.2.1.2. The status of young innovative companies (JEIs) in France

To qualify as a young innovative company, the company must meet several conditions (Service-Public n.d.):

• – it must be an SME, that is, it must not employ more than 250 people, its turnover must be less than €50 million and its balance sheet must be less than €43 million;
• – its research and development (R&D) expenses must represent at least 15% of the expenses deductible for tax purposes in respect of a financial year;
• – it must be independent, that is, at least 50% of its capital must belong to natural persons, research institutions, etc.;
• – it must be less than 8 years old; after this period, the company will no longer be able to benefit from this status;
• – it must be truly new, that is, it must not be the result of a business recovery or restructuring, for example;

This status is specific to “new companies, which were created before December 31, 2019 and which invest in research and development, having the status of young innovative company (JEI) or young university company (JEU),” and makes it possible to benefit from tax and social exemptions.

2.2.2.1. Innovation as a basis for innovative start-ups

Innovation plays a major role in the growth of the economy. The “innovative entrepreneur”¹ is an essential actor for the growth of the economy.

2.2.2.2. The link between innovative entrepreneurship and growth

The report of the General Commission for the Plan mentioned above highlights that a link could be established between the creation of innovative companies and economic growth. It mentions that “entrepreneurial dynamics and economic growth have a mutual ripple effect.” The creation of innovative companies would have an impact on competitiveness as well as on economic growth. With the creation of new innovative companies, existing companies are, in a way, forced to be more efficient in order to maintain their market position. Thus, the creation of these young innovative companies would boost the competitive environment.

The creation of JEIs would in turn create jobs. The creation of start-ups also improves GDP (Cumming 2007; Gans et al. 2002). In 2012, it appears that 20,000 jobs were created and preserved thanks to the status of a young innovative company (Les Echos 2018b). According to Les Echos, nearly 16,600 jobs have been created in France in 6 years thanks to this status.

2.2.3.1. The financing cycle for innovative companies

An innovative company goes through several cycles and each of them often requires a different financing method. During these periods, companies have significant financing needs, especially during the creation and research cycles, and self-financing is often difficult for entrepreneurs. In addition, communication and marketing costs are constantly increasing due to the current competitive environment. It is therefore essential for companies to consolidate their equity and cash flow in order to successfully complete their development. The State proposes direct or indirect aid for this purpose, but this is often insufficient. This is why companies use actors specialized in financing innovative companies.

At the “idea” stage, the entrepreneur must try to develop his project by carrying out some studies and invest in R&D expenditures.

The “design” stage corresponds to the start-up stage, i.e. the creation of the company, its prototyping and the carrying out of more detailed studies.

At the “growth” stage, the company must recruit and seek to produce on a commercial scale.

At “maturity”, the company has found its market-fit and already has a significant number of customers.

During the “decline” phase, the company is looking for new markets and must then, in some cases, face the “exit” phase, which corresponds to the takeover of the company by another company or, quite simply, its exit from the market.

2.2.3.2. The failure of traditional financing methods

The risk of default is very high for young innovative companies, especially when they have high growth potential. In the early stages of their creation, these companies do not have the possibility to provide a guarantee and do not yet generate any turnover. Thus, they will have difficulty using traditional financing methods, particularly bank loans. Indeed, banks are often reluctant to finance young innovative companies.

To better understand the reluctance of traditional financing institutions, particularly banks, it would be useful to understand how the innovative nature of these companies is a significant barrier.

To do this, it is necessary to distinguish between incremental and radical innovations (Freeman and Perez 1988). Incremental innovations are those that involve the improvement of existing products or processes, while radical innovations are technological breakthroughs, most often based on scientific advances. Thus, the more innovative the company, the greater the degree of uncertainty about its viability. This uncertainty refers to internal company issues such as the random nature of R&D spending, or external issues, that is, the ability of the target market to integrate this innovation. Broadly speaking, uncertainty could be associated with radical innovations and risk with incremental innovations. Thus, the higher the degree of uncertainty of the project, the less likely the new innovative companies are to obtain financing from traditional credit institutions, particularly banks (Guilhon and Montchaud 2003). The latter are skeptical about the idea of providing loans to innovative start-ups, especially when they offer radical innovations. Companies proposing too much innovation will have little chance of obtaining bank credit because of the risky and uncertain nature of their project. Banks will be more inclined to grant loans to established firms wishing to implement incremental innovations.

In addition to their innovative nature, start-ups do not meet the traditional criteria required by banks for tangible assets (OECD 1986). Young companies have more intangible assets than tangible assets: know-hows, ideas and technical skills, for example, are intangible assets but, unlike tangible assets, they do not provide sufficient guarantees for credit institutions. The latter will not be covered in case of possible losses.

In addition, their low, and sometimes non-existent, equity capital is a constraint that prevents them from accessing bank financing (Baudry and Allegret 1996). Banks most often agree to grant loans to companies with equity and past profits. Start-ups have little or no equity and are often already in deficit due to the costs incurred in R&D expenses. Moreover, during the start-up period, they are not able to communicate past profits, but only their potential future profits.

2.2.3.3. The main financing methods

As the banking system is inadequate to finance young innovative companies, they must use other means of financing. In this paper, only some of them will be presented. This choice focuses on the financing methods that seem to be most widely used by young innovative companies. In addition, the case of self-financing will not be addressed since the purpose of this paper is to focus on external financing methods. Thus, it will first expose the different modes of public financing and, subsequently, will develop certain modes of private financing.

2.3.1.1. Context of the interviews

The interviews were conducted during the Viva Technology innovation fair on May 26, 2018, in Paris (Porte de Versailles). This exhibition was organized by Publicis and the Les Echos group and takes place every year. It brings together nearly 10,000 start-ups to enable them, among other things, to establish contacts with major international companies.

About 10 interviews were conducted, but in this research paper, only four of them will be analyzed.

The disadvantage of conducting interviews at a trade fair is that the duration of the interviews should not be too long. Each interview therefore lasted for 10 to 15 minutes.

2.3.1.2. Choice of interviewees

Two types of people were interviewed: managers of young innovative companies as well as two organizations providing financial assistance to young French innovative companies, namely a representative of Bpifrance and a representative of Business France.

As far as organizations providing assistance for the financing and development of young innovative companies are concerned, the objective was to be able to understand their functions and their real contributions to French “start-ups”. The choice to question public bodies may inform us about the French government’s attitude towards the issue of young innovative companies and to understand, in concrete terms, the aid offered to them. The idea was also to determine whether improvements should be put in place to strengthen our entrepreneurial ecosystem.

2.3.1.3. Conduct of interviews

The interviews were conducted in the form of a semi-structured individual interview. The interviews were semi-directive in nature as the questions remained open and limited in number. In particular, the questions varied according to the interviewees.

The interviews were divided into three parts:

• – introduction of the interviewee: entrepreneurs or representatives of financing assistance institutions were each asked to present their company or organization.
• – presentation of the means of financing: entrepreneurs were then asked to explain the means of financing used to create their business. Representatives of funding agencies were asked to present all the assistance offered by the agency;
• – the interviewees were also asked to express their feelings about the financing opportunities in France as well as about the quality of the environment (especially fiscal) in which they had to develop. The idea is to know if entrepreneurs consider that France is a country where the environment is favorable to the creation of innovative companies, particularly with regard to taxation and the proposed subsidies.

2.3.2.1. Bpifrance: a link to credit institutions

Interviewing a Bpifrance representative helps to better understand the assistance offered by this structure as well as to understand their strategy.

To make the presentation of the results more readable, we will appoint the representative Mr B.

Bpifrance is a public investment bank. In terms of helping to finance young innovative companies, Mr B defines the BPI as “the only structure to finance this type of risk”³. Indeed, young innovative companies set up projects that often propose a breakthrough innovation, and banks are very reluctant to finance this type of project.

Mr B adds: “We will be the only ones able to mobilize funds far in advance of the others. Banks are too demanding in terms of guarantees and we can afford it”. With venture capital, they are the “only actors who can mobilize debt, particularly to finance subsidies, compared to what the private sector can do”³⁰.

On the financing side, Bpifrance supports young innovative companies in several ways. First, it finances R&D through grants. In a second step, when the company expands and its needs increase, Bpifrance will allow the granting of interest-free loans. Mr B says that they are there to “finance real technological innovations but above all they must sell themselves and respond to a real problem”.

Also in terms of lending, Bpifrance provides an incentive for raising funds, i.e. if the company has not yet raised funds and is facing a “cash flow hole”, Bpifrance can allow them to mobilize a loan upstream, “which is very risky and which the banks refuse to do”. Finally, Mr B states that they are also present to “leverage a fundraising campaign”, i.e. to allow the company’s creators to dilute less and raise a little more capital.

According to Mr B, France is still lagging behind other countries. Moreover, according to him, “London, Israel or Berlin have a real lead in the development of their start-ups”. At this stage, the idea was to solicit Mr B on possible proposals for improvements to the financing system for young innovative companies in France. He was asked to explain the origin of this gap between France and other countries and to explain what, in his opinion, are the significant initiatives of these countries in supporting young innovative companies.

According to Mr B, the amount of fundraising in other cities, such as London, for example, is much higher than in France. In addition, “American investors are raising more money for this kind of country because they have a language in common”. In other words, the United Kingdom seems to attract more foreign investors than France. He also notes that entrepreneurial culture is more prevalent in this type of country. He adds: “There is not necessarily that in France, but for the past four or five years we have been closing this gap”. According to him, today there are more funds raised, more and more young innovative French companies developing and “an entrepreneurial culture being created”. In addition, there is the development of “many incubators” thanks to which France is beginning to catch up.

2.3.2.2. Business France: a support for innovation entrepreneurs

A representative of Business France was also interviewed and will be called Mrs C. She is part of Business France’s Technology and Innovative System department. Business France works in partnership with Bpifrance. The two structures more or less complement each other: Business France representing more of a consulting structure, while Bpifrance takes over in terms of financing.

More concretely, Business France’s role is to “support companies abroad, especially young innovative companies and SMEs, and [their] role is to advise these companies on markets that are a priority for their products and solutions”⁴.

This organization offers “personalized, individual support” for companies by putting them in contact with sectoral experts. The latter advise companies in the long term and help them prioritize countries where their products could develop. Business France also offers a collective support which consists of “bringing together different French companies in the same sector and taking them to major international events such as the ECES or Slush in Finland.” Business France prioritizes innovation and in particular companies that have the potential to develop internationally.

One of the other branches of Business France is the Investment branch. The aim of this sector is “to sell France’s image and attract foreign companies to invest in our young innovative companies.” One of the aspects noted during our interview is that France lacks foreign investors. We must therefore find a way to attract foreign companies to invest in our local start-ups. To this end, Business France organizes “national campaigns to promote French expertise, such as the Creative France campaign.” The idea is also to enhance the skills of our entrepreneurs and to highlight sectors such as “French industry, which is now emerging.” These campaigns are therefore organized to highlight the “success stories in France” and show that France has expertise in certain areas.

Mrs C adds,

The timing is even better with the new President who is very oriented towards young innovative companies, which allows us to benefit from it. We often use the name of start-up nation even if this name is more associated with Israel but the objective is above all to show that a real dynamic has been created in France.

The objective is to ensure that France becomes a target for innovation.

2.3.2.3. Analysis of the results

These interviews provided insights into the “state of mind” of public financing operators with regard to the financing and development of young French innovative companies. There are several points to remember.

First, as the Bpifrance representative pointed out, France is still lagging behind other countries such as the United Kingdom, Israel and Germany. Incentives to finance start-ups are more present in these countries and the funds raised are higher. But, in general, these two interviews showed us that France is increasingly trying to catch up. Moreover, with the election of Emmanuel Macron and his ambition to make France a “start-up nation”, a real dynamic has been created.

The objective of a structure like Bpifrance is not really to finance young innovative companies, but to help them by providing them with grants or interest-free loans. It accompanies and supports companies in their initial start-up phases and then relays it to investment funds. It is conceivable that, at the seed stage, France effectively helps young companies, but that, once they have reached a certain level of maturity, finance is given to investment funds which are, a priori, less present in France than in other countries.

Second, it can be assumed that France is not yet attracting enough foreign investors. The objective of a structure like Business France is to attract foreign investors to help young French entrepreneurs develop their project. As Mr B pointed out, one of the reasons for France’s retreat faced with a country like the United Kingdom is that it attracts more foreign investors.

To enhance France’s image and attract these investors, it will be necessary to highlight the expertise of our entrepreneurs. This is why national campaigns are organized by Business France. The objective is to show that France is a land of innovation.

2.3.3.1. The case of the “Healthy Mind” company

One of the partners of the young innovative company, Healthy Mind, who was also present at the exhibition, was interviewed. This young innovative company was created in December 2017 by three young engineers and offers a therapeutic virtual reality solution for healthcare institutions that wish to reduce patients’ pain and anxiety. The patient will be able to benefit from virtual reality as a replacement for medical treatments (anxiolytics, for example). A realistic natural environment is projected into virtual reality to allow the patient to relax. This concept was developed in collaboration with psychiatrists and physicians.

As far as their financing is concerned, the three partners created the company from their own funds. As the partner interviewed states: “Throughout the design phase of the project, we had to work in parallel to raise money. The three of us were able to save €10,000 in six months”⁵. He adds: “It was very complicated and after a while we were lucky enough to get external funding of €100,000”. Indeed, the partners were able to benefit from a sum of money from a benefactor donor, commonly known as “love money”. In other words, a member of their entourage agreed to help them financially without seeking a return on their investment. However, the investor holds shares in the company, but its primary purpose is above all to help the company’s creators.

For the partner, creating an innovative company is not necessarily complicated because “many aids are available, particularly at the early stage, with public aids, subsidies or even competitions which are, according to him, ‘hidden subsidies.’” However, as the company matures and seeks to “rise to the next level”, finding financing becomes more complicated. According to him, the French remain rather “cautious” when it comes to investing, compared to other countries.

2.3.3.2. The case of the “Géonomie” company

Géonomie was founded by three partners in November 2015. It is a French application that allows falls to be detected thanks to its pairing with a connected bracelet. It can be used by seniors, cyclists or anyone who wants to protect themselves from the risk of falling.

To finance itself, Géonomie used several means. As one of the partners explained during the interview, Géonomie was created thanks to a “crowdfunding” campaign that allowed them to raise €8,000. As the partner explains: “Raising such a sum was a real challenge at the time because our target of €8,000 corresponded to twice the usual campaigns”⁶. Succeeding in obtaining such a sum from individuals was not only an opportunity for them to develop their project but also to “gain visibility”.

One year after this campaign, the company had its first funds from a business angel, an amount of €110,000, a small amount that allowed the company to grow. Currently, the company has been able to obtain the aid of subsidies as well as a repayable advance from the State. They also called on the BPI and in particular on French Tech, which awarded them the French Tech Grant.

One of the company’s partners also pointed out that the status of JEI has greatly helped them since it has enabled them to obtain a Research Tax Credit. This credit does not really represent financing but rather “cash that [the company] will later recover through expense reductions, for example”. The tax credit will, in particular, cover the share of expenses related to research.

2.3.3.3. Analysis of the results

These two interviews, as well as the six others not transcribed here, show that innovation entrepreneurs often use public aid, in particular subsidies or aid offered by the BPI. It also appears that the speakers are often satisfied with the support provided in France to young innovative companies. One of the points that was raised during the interview with the partner of Healthy Mind is that at the seed stage, entrepreneurs generally have no difficulty in finding financing. However, once the company expands, public support is no longer sufficient and young entrepreneurs must seek private investors, which seems more difficult. In France, venture capital and business angel networks are less developed than in other foreign countries.

It also seems interesting to mention that, among the interviewees, one of them used crowdfunding or participatory financing. These financing methods are an alternative to traditional financing methods.

2.4.2.1. Increased support for venture capital initiatives

In the United States, there are many public initiatives aimed at supporting and strengthening venture capital. One example is the SBA or “Small Business Act” in which the administration is involved in venture capital through, in particular, the Small Business Investment Companies (SBIC) program. These SBICs have been in existence since 1960 and control the majority of U.S. private venture capital companies. They allow financing through low-interest loans from the government. Companies such as Apple or Intel have been created by the SBIC program. SBICs still play a major role, particularly in seed capital, since they provide approximately 64% of the funds invested in seed capital.

In addition, the Small Business Innovation Research (SBIR) program has been a public technology start-up program since 1982. This program allows companies, as well as researchers, to create and develop new products on behalf of government agencies. R&D contracts are then signed between SMEs and government agencies with a promise of pre-commercial contracts.

Through this program, more than 4,000 businesses are created each year and the amount of subsidies amounts to nearly $2 million. Thus, with this analysis, we can say that the United States is making a significant effort to develop venture capital by setting up original institutions based on government initiatives.

2.4.2.2. The important role of business angels

In addition to venture capital, the United States has an extensive network of business angels. In 2007, business angels invested €26 million in approximately 57,000 companies. These investments represent almost as much as those of other venture capital companies (Metrick and Yasuda 2007). Historically, business angels have financed ten times more start-ups than venture capital companies (European Commission 2002). These investors are particularly attracted to the high-tech sectors and their professional experience is a guarantee of the effectiveness of their skills.

In Europe, the weight of business angels is much lower, particularly in France. According to the Guide de la jeune entreprise innovante (2017), there are “about 4,000 [business angels] in France, compared to 40,000 in Great Britain and 400,000 in the United States”. The reason for this difference can be explained by the resistance of entrepreneurs to this method of financing. One of the ways to improve our entrepreneurial ecosystem would be to encourage investors such as business angels to emerge in France and invest in our young innovative companies.

In conclusion, one of the initiatives to be taken by France would be to promote both venture capitalists and business angels. The role of the French public authorities will be all the more important because it will have to set up more favorable institutions and develop appropriate incentives, while trusting private investors. In addition, it would be interesting to draw inspiration from the SBIC and SBIR programs, since they have a significant impact on the dynamics of innovation. Developing such programs can only have a positive impact on our ecosystem of innovative start-ups.

2.4.3.1. Entrepreneur Investment Scheme (EIS)

This scheme was set up in 1994 to help high-risk companies raise funds to finance their projects. The EIS offers a range of tax deductions to investors who wish to acquire shares in young innovative companies. Certain conditions are imposed to be eligible for the EIS scheme, namely:

• – the company must be a non-listed company;
• – the company should not be controlled by another company;
• – the company’s gross assets may not exceed £15 million before the issue of shares;
• – the company must have less than 250 employees when it subscribes to the capital;
• – funds raised should only be used for investment activities;
• – these funds must be used within 2 years;
• – the company must conduct its business activities only, or mainly, within the United Kingdom.

EIS has many advantages for investors, including:

• – since 2012, the EIS has enabled investors to benefit from an entry tax reduction of up to 30% of the amount invested. The investor must have invested between £500 and £1 million and must not be connected to the company (i.e. its shareholding in the company must not exceed 30%). The shares must be kept for three years. Before 2012, the tax reduction was 20% and the investment limit was £500,000;
• – after three years, investors will be able to benefit from a capital gains tax exemption;
• – the possibility of deducting losses from EIS subscribed shares from all income is available to investors.

According to HMRC figures, the UK Treasury, approximately £14.2 billion was invested through EIS from 1994 to 2015, and 24,000 companies were able to benefit from these funds.

2.4.3.2. Seed Entrepreneur Investment Scheme (SEIS)

This scheme was introduced in 2012 with the objective of providing benefits to individuals who wish to invest in small businesses at the seed stage. With SEIS, individuals can invest up to £100,000 per tax year and also get a 50% income tax reduction. In addition, they will be able to benefit from an exemption from capital gains tax if they keep their shares in the company for three years. However, as with EIS, investors may not hold more than 30% of the company’s shares. To be eligible for the SEIS scheme, certain conditions must be met:

• – small businesses benefiting from SEIS funds must be less than two years old and have fewer than 25 employees;
• – they may not receive more than £150,000 via SEIS;
• – their assets may not exceed £200,000.

For the 2014–2015 financial year, 2,290 companies received funds under the SeedEIS scheme for investments for £175 million.

This measure, described by Angel Dale Murray, advisor to the Center for Entrepreneurs, as “the world’s most generous plan for angel investors” has the advantage of encouraging individuals to invest in innovative small businesses. These measures represent important tax measures and contribute to unlocking investment for small businesses. The existence of mechanisms offering tax advantages to investors can influence their decision-making and motivate them to invest.

2.4.3.3. “Entrepreneurs’ relief”

This provision allows a reduction in capital gains tax in the event of a transfer of securities by the entrepreneur. His or her earnings will be taxed at the rate of 10% instead of 28% (normal rate). To be eligible for this tax benefit, you must be a director or partner and hold at least 5% of the voting rights and have held them for at least one year before the transfer. Investment activities are excluded from the scheme.

This rebate can be applied at any time and its ceiling, initially £8 million, is now set at £10 million.

As the iFrap Foundation explains in its article, this measure is highly appreciated by young British entrepreneurs as they do not feel “penalized” for their success. These measures have a cost but have the advantage of encouraging investment in start-ups and, at the same time, boosting the economy.