Reflexion Capital: Venture Investment That Makes Sense
I spoke with Nicolas Meunier, founder and CEO at Reflexion Capital, about a fund's project opening a new investment category between bootstrapping and hyper-growth in tech.
Reflexion Capital is a tech investment platform launched in 2019 by Meunier, formerly a partner at Hi inov. The entity, with offices in Paris, is awaiting regulation as a financial management company. The French regulator (AMF) should grant them its approval by this summer. Meanwhile, Meunier, his partner, Ivan Michal, a former partner at Newfund, and Augustin de Cambourg, an investment associate, previously a fundraiser, invest on a deal-per-deal basis using special purpose vehicles (SPV). In 2020, they made their first two investments in French companies: Crowdsec (EUR 1.5m) and Getfluence (EUR 2.6m). From 2021 onwards, they plan to make four to six investments every year across Europe.
To do that, they rely on a community of about 50 successful entrepreneurs who assess opportunities, invest in companies, and support them with expertise and connections. This group includes well-known entrepreneurs operating in various industries, including Thierry Rouquet (Arkoon/Sentryo), Julien Lopizzo (Major Corp), Christophe Courtin (Santiane), Robert Picarel (Velvet Consulting), and Didier Miraton (ex-Michelin), among others. They all share an offbeat vision of how to build and fund tech companies.
In between bootstrapping and hypergrowth
Reflexion Capital departs from the traditional VC industry, which backs companies giving up on profitability for the sake of hyper-growth. When I asked Meunier to share his view about it, he responded at once:
As investors, we should be concerned by VC-backed companies like Uber: Twelve years after its launch, the company has raised USD 25 billion and is still losing more than USD 100k per hour, with many social protests and lawsuits, including unfair labor practices, unfair competition, or antitrust practices (as reported by the Guardian). Funding hyper-growth to hack a market at the expense of society raises questions.
According to Meunier, Uber is symptomatic of this hyper-growth capital-intensive model, often based on dumping, unreasonable (marketing) expenditures, and workers' exploitation.
On the opposite end, companies try to self-finance their business through bootstrapping but with severe limitations to reach a critical size.
Reflexion Capital lies between these two extremes, following the path of "profitable growth." They look for companies that have successfully bootstrapped until a significant post-revenue threshold (app. USD 1m in sales) generated reasonable but repeatable growth and need a capital increase to cover negative cash flows for one or two years.
It is fine to go EBITDA negative for one or two years, which is the right amount of time to build solid foundations for the future, structure the organization, hire top executives, train people, invest in the product to make it better and more attractive, and prepare the company to expand internationally. These operations contribute to building healthy tech companies.
"Growth and profit are not opposite," Meunier said. "We use profitability as a blueprint to ask the right questions and help entrepreneurs build enduring companies."
A VC alternative for grounded entrepreneurs
From his previous experience, Meunier sees two main categories of entrepreneurs.
One such category is those who want "to grow at all costs to hack a market." To succeed, they must focus on the top line (i.e., sales), fundraise continuously, accept high dilution, and hire—often exhausting—many people. Their success metrics revolve around market traction, funding, and headcount. This category of entrepreneurs fits well within the traditional VC mindset, but "if they don't meet expectations, investors will spend less time with them and more with the winners. It is a hit-or-miss bet," Meunier said.
The second category of entrepreneurs is more sensitive to their impact and dilution. They are also more suspicious towards investors. They try to bootstrap their businesses and postpone fundraising until they reach glass ceilings. When they must fundraise, they handpick their financial partners and carefully size their funding. They attribute their success to team engagement, product satisfaction, and financial autonomy. Their mindset is not so compatible with VCs. "They are afraid of VCs, and VCs think they are not ambitious," Meunier said.
The best human and financial experience we had was with the second category. We noticed that with a small amount of capital, broken down into one or two rounds, we could build solid companies and manage to exit with multiples between 1.5x and 10x within six years. To partner with these entrepreneurs, we must be there at the right time, reassure them, and advise them.
Reflexion Capital positions itself as an alternative to current VC investors by offering entrepreneurs calibrated funding, supportive relationships, bootstrapping recognition, and financial autonomy.
Entrepreneurs we back have more freedom and more independence to finance their growth. They keep the absolute majority of their company (i.e., more than 51%). For key employees holding stock options, we make sure that these stock options are worth something, that is, several years of salaries. After three to five years, they may buy us out to get complete independence or move forward with LBO investors, with cash-out opportunities.
This type of financial partnership is expected in the private equity sphere for mature companies. Reflexion Capital makes it possible at an earlier stage of maturity.
Walk the talk
This could be the core principle of Reflexion Capital, as they apply what they promote. Although the team has a track record and a supportive community, they do not have a regulated fund yet and must find creative ways to execute their plan.
To gain time pending approval, we create and administrate SPVs. Although it can be more time-consuming and limit our capacity to invest, we go through it, for the time being, because we believe in what we do and want to own our space promptly.
Their goal is to fill the "Equity Gap" between pure VC and LBO funds by mitigating risks while capturing early-stage potential.
Unlike LBO fund managers, we enjoy and know how to navigate project mode, structure growing businesses, manage transition phases, and bring tech companies to profitability. Once the company is self-sustaining, its valuation is higher, and exit opportunities are more tangible.
At the end of our discussion, I asked Meunier if we should call Reflexion Capital a VC. He hesitated and replied, "We are a VC in the sense that we finance innovative companies. We are not a VC if the goal is to hack a market. Somehow, we consider ourselves as bootstrappers."
Considering the number of decks received (204 in 2020, and almost as much in 2021 Q1), entrepreneurs seem convinced already. The next step is to onboard institutional investors. Meanwhile, Reflexion Capital proceeds with determination and endurance, as true entrepreneurs do.