June 25 (Bloomberg) -- On a spring afternoon, Xavier Niel enters the boardroom of Iliad SA, the Paris-based telecommunications firm he founded two decades ago. He’s wearing a white dress shirt and jeans, the same outfit he’s sported with Steve Jobs–like regularity for years. With his longish hair and rumpled attire, he looks more like a hacker who’s blundered into the wrong office than a man who’s worth $10.5 billion.
Niel takes a seat at the head of a white conference table. The glass-enclosed suite feels like an aerie suspended above the city, with a panoramic view of the Eiffel Tower on one side and the rooftops of Montmartre on the other. The only objet d’art in the room is a black brick-shaped box mounted like a conversation piece on top of a coffee table.
It’s the Freebox Revolution router, which delivers a triple play of broadband, TV and landline telephone calls to Iliad’s 6 million subscribers. The router’s popularity is a big reason Iliad’s stock returned 151 percent in the three years ended on June 24, Bloomberg Markets magazine will report in its July-August issue. That’s 15 times better than market leader Orange SA, formerly state-owned France Telecom SA.
As France struggles to rebound from 12 straight quarters of economic stagnation, Niel has emerged as something rare in Gallic business life -- an entrepreneur who’s defied his country’s malaise.
“You can say it’s worse in France than it is in other countries,” says Niel, 46, scrunching up his face in a squinty smile. “We have too much debt, of course, and we had very bad management of the country. But we created a company with a market valuation of $19 billion. That’s not so bad, right? It is possible here.”
It’s highly unlikely. French business has long favored corporate conformity over taking risks, says Marie Ekeland, a partner at Elaia Partners, a private-equity boutique in Paris. The CAC 40 Index is loaded with conglomerates, banks and manufacturers -- and not one young Internet technology powerhouse.
“We’ve lacked an entrepreneurial culture throughout our whole society,” Ekeland says. “That’s why we have such a problem with economic growth.”
France’s current travails have plunged the country into a deep funk. Its industrial icons are struggling; on June 22, Alstom SA, the ailing rail transport and power equipment manufacturer based in Paris, agreed to sell its energy assets to Fairfield, Connecticut–based General Electric Co. for $17 billion. Francois Hollande, the nation’s Socialist president, is foundering; his approval rating of 18 percent in recent polls was the poorest showing of any head of state in the postwar era.
‘Oui a la France!’
On May Day, the streets of central Paris weren’t filled with proud trade unionists celebrating their progress. Instead, thousands of supporters of the National Front, the right-wing, anti-euro, anti-immigration party that’s excoriated Hollande as the European Union’s puppet, marched down the Rue de Rivoli past the Louvre, waving tricolor flags and shooting off red, white and blue smoke bombs.
“Oui a la France!” they shouted. “Marine president!”
The object of their affection, party leader Marine Le Pen, beamed as she led them past a statue of Joan of Arc. Later that month, the party marshaled a potent protest against the status quo: In European Parliamentary elections, it drew 26 percent of the vote, scoring an unprecedented first-place finish in a national poll.
Undeterred by such angst, a new generation of French tech players is plowing ahead with the rollout of innovative technologies and companies. Criteo SA, a Paris-based maker of online advertising software, raised $250 million in an initial public offering on the Nasdaq Stock Market in October. And Accel Partners, the Palo Alto, California–based firm that backed Facebook Inc., is investing in French startups.
In Niel -- a man who owns the rights to the music in “My Way” -- aspiring French entrepreneurs have found their ringleader. The son of a pharmaceutical patents consultant and an accountant, Niel grew up in a Paris suburb, skipped college and started his career writing software code for online sex chat rooms. Today, he heads France’s No. 2 broadband provider, co-owns the prestigious newspaper Le Monde and is the sixth-richest person in the country, according to the Bloomberg Billionaires Index.
“The traditional trajectory in France is to attend one of the top schools and then go work for a CAC 40 company for the rest of your life,” says Martin Mignot, 29, a French venture capitalist in the London office of Index Ventures. “But Niel is the exception that confirms the rule: He’s a self-made man, a geek, a programmer. Niel is a paradox of France, and to us he’s a hero.”
Ever since Niel launched France’s first Internet service provider in 1993, he’s rocked the country’s telecom oligopoly. In 2012, he introduced a mobile-phone service for 19.99 euros ($27.24) a month, less than half the price charged by competitors. More than 8 million consumers flocked to Free Mobile as Orange and France’s two other wireless operators, Vivendi SA’s SFR division and Bouygues SA, suffered steep declines in sales.
In April, Vivendi vacated the market altogether by selling SFR to Luxembourg-based Altice SA in a deal valued at 17 billion euros.
“Iliad’s pressure produced really big consequences,” says Sam McHugh, a London-based equity analyst with Sanford C. Bernstein & Co.
Niel has now set out to disrupt the French corporate system as a whole by using his wealth to build a Silicon Valley–inspired ecosystem that will foster tech startups. What France needs, he says, is a community in which computer scientists, business leaders and investors can come together and form new companies that create jobs, wealth and serial entrepreneurs who go on to launch more ventures. France doesn’t have an institution steeped in entrepreneurship, such as Stanford University, to act as the hub for such a network.
So last September, Niel invested 200 million euros in a three-year project to convert La Halle Freyssinet, an 87-year-old former railroad depot on the Left Bank, into a center for 1,000 startups. And he spent 70 million euros in November to open a school that’s teaching 900 students from the ages of 18 to 30 how to write software code. Tuition is gratis, and there are no prerequisites for acceptance except passing a logic exam.
“Mark Zuckerberg did his own software for Facebook, and Larry Page and Sergey Brin made their own for Google,” Niel says. “If you know how to make software, then you can create big things. We want to build an ecosystem for startups so young people don’t have to leave for the U.S. or Asia.”
Yet conditions in Europe’s No. 2 economy have worsened in the past year even as the fortunes of Germany (No. 1) and the U.K. (No. 3) have improved. What’s more, France’s high labor costs are stifling a recovery, says Richard Batley, an economist at Lombard Street Research Ltd. in London.
“It’s very expensive to hire people in France, and you can’t be that nimble,” says Marc Tommasi, head of global investment strategy at Manning & Napier Advisors Inc., a Fairport, New York–based money management firm with $52 billion in assets that invests in French stocks.
In the latest Bloomberg Markets Global Investor Poll, only 11 percent of the participants were optimistic that Hollande’s policies would improve the investment climate, a poorer showing than Russian President Vladimir Putin’s 15 percent score.
Hollande is trying to turn things around by cutting 50 billion euros in public spending over the next three years and reducing payroll taxes. And yet the outcome of the May election will sow only more economic uncertainty, Batley says.
“Ultimately,” he says, “this could produce a lower level of investment.”
The French government has a knack for meddling in deals, which is anathema to VCs seeking profitable exits from their investments. In April 2013, then–Minister of Industrial Renewal Arnaud Montebourg blocked Yahoo! Inc.’s $300 million purchase of French online video firm Dailymotion SA after concluding the deal wasn’t in the national interest.
Tax policy is another brake on growth, Elaia’s Ekeland says. In 2012, the Hollande government raised capital gains taxes to as much as 62.5 percent from 38.5 percent. France Digitale, a trade association Ekeland heads as president, persuaded policy makers to provide lower rates for startup investors who stick with their bets for at least one year.
“Our politicians do not understand the Silicon Valley model,” Ekeland says.
Hollande is making overtures to the tech community. In March, he invited Niel and 20 other startup entrepreneurs to lunch at the Elysee Palace to learn more about their ventures. And there’s been an unprecedented blossoming of tech startups in Sentier, Paris’s old garment district, and Saint-Georges, home to the Moulin Rouge burlesque palace.
“We have a mindset to think globally and to be an Internet-driven company, not a French-driven one,” says Jean-Baptiste Rudelle, 45, chief executive officer and co-founder of Criteo, which operates in the U.S., Europe and Japan.
Ventures that are further along in their development are rapidly expanding. Paris-based BlaBlaCar, an online marketplace where drivers and passengers across Europe connect to share automobile rides, is adding 500,000 new users a month. Self-styled accelerators are hosting scores of entrepreneurs in clubhouses where they write code and network with VCs and peers.
On a damp spring evening, more than 200 men and women crowd into one of the hubs of the Paris startup scene, a four-story former schoolhouse located not far from where the Bastille once stood. Furnished with red-velvet chairs, oriental rugs and potted palms, the glass-ceilinged atrium resembles a parlor from the belle epoque.
The word “revolution” glows in green neon on the wall. A manifesto, written in English, is tacked up in the foyer.
“Employment as we know it is dead,” it reads. “The new generation is not looking for a job, but strives to find purpose.”
This is the headquarters of TheFamily. Backed by Index Ventures, a global venture capital firm, and angel investors in Europe and North America, TheFamily takes a 3 percent equity stake in more than 150 ventures, many so new that they’re little more than a couple of code writers with a PowerPoint presentation. In return, as its very name is meant to suggest, TheFamily and not the government provides members with office space, workshops and access to its network of venture capitalists.
On this night, TheFamily is hosting a pair of Silicon Valley entrepreneurs, John Ramey and Tyler Willis. As the two Americans lecture in English on ways to build fast-growing online marketplaces, the attendees munch on cookies and tap notes into their laptops.
“Our mission is to help a new generation of entrepreneurs take power and really disrupt France by creating billion-dollar companies,” says co-founder Alice Zagury, a cheerful woman with electric auburn hair who’s sporting shiny, gold shoes.
Zagury, a 29-year-old graduate of the Indian Institute of Management Indore in Madhya Pradesh, and her two partners, entrepreneur Oussama Ammar, 27, and former government finance inspector Nicolas Colin, 37, were inspired by Y Combinator, the Mountain View, California–based accelerator.
It’s midwifed thousands of startups, including Airbnb Inc., the online lodging-rental marketplace that was recently valued at $10 billion.
Just like their ally Xavier Niel, the trio want to cultivate a tech ecosystem that will demonstrate that France isn’t just a land of high taxes and aging industrial giants.
“If we build companies that matter, investors will see the result and not this toxic environment that’s in the news,” says Ammar, who’s dressed entirely in black.
‘We are French!’
While the partners admire the ethos of Silicon Valley, they say they’re developing their venture in a “French context.” They found Y Combinator’s demo days -- contests in which entrepreneurs pitch their products to hundreds of investors -- to be too public and too hurried for French sensibilities. In France, investors like to unearth promising companies more discreetly and build relationships over time.
In a further sign of Frenchness, at TheFamily you won’t find piles of empty pizza boxes that typically mark the habitats of programmers elsewhere. Instead, the group brings in a chef to prepare fricassee of rabbit, coq au vin and other delicacies for meetings.
“It’s a cliche, but it’s true: We love food, so we organize a lot of our events around the table with good wine,” Zagury says with a sheepish grin. “We are French!”
‘Ministry for Startups’
Niel applauds TheFamily’s decision to not turn to the state for financial assistance. So that the state doesn’t suffocate this fledgling startup scene, he says, it’s imperative for young companies to rely on private funding. He’s wary even when the government offers support, as it did in December with the rollout of La French Tech, a plan to spend 200 million euros on promoting and supporting startups.
“Does the U.S. need a ministry for startups?” Niel says. “So we ask for nothing from the government. It blocks innovation. You have to find your own way.”
Niel’s been an outsider ever since he formed his own company at the age of 14. Smitten with writing code, he created programs to manage X-rated message boards on the Minitel, a proto-Web network that enabled French consumers to shop and chat online. (In 2004, Niel’s racy past caught up with him when the French authorities jailed him for one month on charges connected to his ownership of peep shows. He pleaded guilty, received a two-year suspended sentence and paid a 250,000-euro fine for not declaring income from the enterprises.)
By the time Niel was 33, in 2000, he’d become a multimillionaire through his programming and by selling an Internet service provider he co-founded in 1993. Backed by an investment of 15 million euros from Goldman Sachs Group Inc., the young entrepreneur formed Iliad to challenge France Telecom. His weapon: a router that would use broadband to deliver the Web, TV and telephone service to French homes.
The problem was that such a device didn’t exist yet. So Niel formed a 10-member research team in Paris to build one. In 2002, he launched Freebox two years before Cablevision Systems Corp., based in Bethpage, New York, brought out the first triple-play offering in the U.S.
Niel was adept at exploiting his monopolistic rival’s weakness -- high prices. He offered Freebox for 29.99 euros per month. France Telecom was selling broadband alone for 49.99 euros. And with download speeds of 1 gigabyte per second, Niel didn’t skimp on the technology.
“Free is perceived as the best network -- and the cheapest network,” Bernstein’s McHugh says.
Now that France’s mobile war has climaxed with Vivendi’s sale of SFR, Niel is morphing from enfant terrible into startup guru. Every month, he visits the software-writing school he bankrolled to talk with students. It’s called 42, after the non sequitur answer to the “ultimate question of life” posed by Douglas Adams’s “The Hitchhiker’s Guide to the Galaxy.” When Niel opened 42 in northwest Paris in November, more than 70,000 candidates applied for 900 places.
Encased in gray mesh, the three-story school resembles a giant server cage. Inside, students, many in hoodies, sit at rows of long tables topped with iMacs. There are no classes or teachers. Instead, students are responsible for designing and writing their own software programs, which are reviewed and graded by their peers.
Audrey Bosdeveix, a 28-year-old former waitress, says she’d forsworn a tech career because of her weak math skills. She passed 42’s logic test and today is correcting a fellow student’s work.
“I’d like to design apps for mobile,” she says.
For Niel, 42 may ultimately prove the most radical move in his unorthodox career. Legions of unhappy professionals are leaving France; about 300,000 French nationals reside in and around London, according to the French Consulate there. For more than two decades, the unemployment rate among French citizens under 25 hasn’t dropped below 16 percent. It stood at 23.2 percent in April.
“We have to help young people, because at the end of the day, we won’t have an economy if we don’t have them,” Niel says. “We need startups; we need entrepreneurs; we need young people who will create global companies.”
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