With startups running out of cash, the French tech fire sale is in full swing — and it’s emblematic of a broader collapse across Europe that is forcing desperate startups to sell at any price.
The rising wave of selling suggests that many founders and VCs are still just beginning to feel the consequences of the frigid funding climate, marking a painful end to an era of startup excess.
“Companies burned cash, they spent on marketing, they recruited profusely, they made bad decisions, they bought big offices and, today, they find themselves with a model that isn’t sustainable,” said Olivier Saint-Marc, senior analyst at M&A advisory firm Avolta. “They still need cash but no one can back them anymore, so it’s a fire sale.”
Avolta recorded 201 exits in France in the first half of 2023 — up almost 10% compared with the same period last year. Yet the total value of €738m is 71% less than the 184 deals that closed in the first semester of 2022. And the average deal size has collapsed from €40m to €10m.
These numbers are based on a subset of exits where parties voluntarily communicated the details — and the fact that fewer companies were willing to communicate the deal value in 2023 suggests bad news, says Saint-Marc.
It’s a rude dose of reality for an ecosystem that had known only exuberance in recent years. In the first half of 2023, startups raised about half as much as they did in the same period a year earlier. That drop was 37% and 62% in Germany and the UK, respectively.
Now that funding has dried up, companies frantically have tried to cut costs in a bid for profitability, but many have found themselves caught short, with no additional funding in sight. M&A is the exit of last resort for some — and an opportunity for others.
Falling from startup grace
One of the most dramatic falls from startup grace was the recent sale of French insurtech startup Luko.
The company had raised €68m and by early 2022 looked like a juggernaut. That spring, it acquired two companies to fuel a European expansion.
That’s when Raphaël Vullierme, CEO and cofounder of Luko, said he began the fundraising process for a Series C round. But, then, publicly traded insurtech stocks crashed in the US and VCs suddenly soured on the sector.
Unable to raise more money, Luko cut staff, new product development and exited some countries. But it wasn’t enough. Earlier this year, Luko sought protection in a French business court to renegotiate €45m in debt.
During those legal proceedings, UK-based Admiral Group announced it had acquired Luko. While the companies did not disclose the value, reports suggest it was around €14m — a humbling amount for a company once valued at €220m.
“The risks we have taken in 2022 are probably the same risks we would have taken in 2020,” Vullierme said. “But in 2020, those risks were highly valued by the market. To build this company, you need to be incredibly aggressive and pushy and take risks, and be bold. When markets turn around, you’re much more exposed.”
A sale puts a concrete value on an investment that can’t be ignored — meaning that a reckoning is at hand for VCs who have reportedly been reluctant to mark down their portfolios to reflect the decline in value of their holdings.
Jean de La Rochebrochard, head of Kima Ventures, recently noted in his newsletter headlined “Delusion” that the firm had written off two startups it had backed with €150,000 each. Kima’s investments at one point had a combined value of $8m.
One of those companies was Luko.
“Those two companies are part of a portfolio of 1200 companies in total, and they are just larger rocks that followed a lot of small ones over the past few months, but I do believe that sooner rather than later, larger ones will come off that mountain of paper money,” he wrote. “The next six to eighteen months won’t be pretty, that’s for sure.”
One man’s trash is another man’s treasure
While for some founders, the end of easy money means selling the company for a disappointing cheque, others are finding themselves in a stronger position. Startups with a bit of spare cash are ready to rummage through the bargain bin.
Buying competitors’ technologies at a cheap price is a great way to develop rapidly, offer new services and expand to new markets with limited cash burn.
Such was the case of French aerial drone manufacturer Delair, which at the beginning of the year announced the acquisition of underwater drone startup Notilo Plus. Notilo Plus had raised almost €3m in early-stage funding with an estimated valuation under €13m.
But the high cost of building a complex piece of hardware like an underwater drone meant that Notilo Plus needed funding — a lot of it. Facing a cash squeeze, the company had started bankruptcy proceedings when Delair bought it out.
“They collided with a moment in time when money was less easy but they still needed to finance the development of their product,” says Bastien Mancini, CEO of Delair.
Delair focuses mainly on industrial and defence applications and Mancini’s ambition is to eventually build autonomous observation vehicles that can be deployed on land, air and sea. Although the founder declined to say how much he paid for the company, it likely came at a steal.
“It would have cost us several million euros to build this product and we paid a fraction of that for a product that was immediately available,” says Mancini. “It was a good opportunity for Delair.”
As a company that has cash in the bank — the business has been profitable since 2021 — Delair is in a strong position. “It’s a buyer’s market,” says Mancini, adding that he is keeping an eye on other opportunities.
Similarly, earlier this summer digital video startup Cenareo unexpectedly found itself in a position to make an acquisition. Launched more than a decade ago, the company had taken a measured approach to its growth and funding, raising only about €3m, according to cofounder and CEO David Keribin.
Cenareo had entered 2023 as a profitable company when it heard that EasyMovie, a Paris-based video-production startup, had filed for bankruptcy.
EasyMovie had tried to expand into enterprise software sales but it didn’t pan out as expected. Soon, the company was scrambling to curb expenses.
Keribin said the company got close to break-even as it slashed staff from 140 to 55 and raised some convertible bonds last year. But it wasn’t enough to avoid bankruptcy.
Keribin heard about the bankruptcy filing through a board member and quickly made a bid. Though he didn’t disclose the full value of the deal, he said the price included paying about 10% of EasyMovie’s €4m debt. Cenareo is keeping 45 of EasyMovie’s remaining 55 employees.
In the current market, Keribin is keeping an eye out for other bargains and is working with advisors to draw up a list of potential targets — deals that would likely involve raising money specifically to fund those purchases.
“Two years ago, this would have been absolutely impossible for us with the multiples,” Keribin said. “Clearly, it’s a major opportunity. And it is a major opportunity for a lot of startups and there will be a lot of them in the coming months and years.”
Budgeting for a shopping spree
Online marketplace unicorn Mirakl is likely drawing up an even bigger acquisition list.
The company has raised €870m, including €780m in 2020 and 2021 before the funding party ended, and is widely regarded as one of France’s leading candidates for a major IPO in the coming years. In early August, the company leveraged that momentum to obtain a €100m line of credit to pursue acquisitions.
Mirakl CFO Eric Heurtaux said the company still has plenty of that VC money in the bank. The debt will give it greater flexibility to move quickly if it spots an acquisition opportunity, especially companies that can reinforce new product areas or boost its capabilities in areas such as AI.
The company says it is getting a growing number of pitches from companies facing cash crunches, and Heurtaux says the challenge now is to maintain discipline.
Despite the drop in valuations, price can’t be the main rationale for a deal. Instead, the key is to find startups that fill a strategic need, with the ideal being a company that has developed robust technology but hasn’t been able to raise its next round.
“We are not gamblers and we will not just buy something because it’s cheap,” he says. “I’m more eager to pay more for good targets than to buy at a very cheap price a company that is not the best fit for us. The deals are too critical for us to just bet on the recovery of a struggling company.”