The Startup Yahoo Won't Be Buying

PARIS — Stamped, On The Air, SnipIt, Jybe, Alike and Summly: Yahoo's six acquisitions in recent months under Marissa Mayer's new leadership. The French video-sharing platform Dailymotion was to have been the seventh. Over 20 million videos, 112 million monthly unique visitors, a valuation around $300 million: a crown jewel for Mayer's content strategy and an inspiring success story for French tech entrepreneurs.

But it won't be.

Yahoo backed out of its deal to buy 75% of the company from main owner Orange/France Telecom after French Industry Minister Arnaud Montebourg intervened to stop the sale. (The French State has a 27% share.) The Wall Street Journal reports:

At an April 12 meeting in Mr. Montebourg's Paris office, the minister told Yahoo's chief operating officer, Henrique de Castro, and France Télécom's chief financial officer, Gervais Pellissier, that he didn't want 75% of a rare French Internet success story to be sold to an American Web giant, according to people briefed on the meeting.

"I won't let you sell one of France's best startups," Mr. Montebourg told Mr. Pelissier, his voice raised, according to people briefed on the meeting. "You don't know what you're doing."

I understand the patriotic impulse to keep the French Internet's pride and joy in its homeland, but frankly, Mr. Montebourg is the one who doesn't know what he's doing. He just grabbed a rifle, aimed it at our national foot and shot with no remorse.

A whale can't grow in an aquarium

Simply put, France doesn't have the ecosystem to sustain a world player in the Internet economy. It's too small a market, without enough venture capital, without enough skilled talent and without the networks and entrepreneurial culture that make all the difference in growing a startup. We have great ideas and very promising tech entrepreneurs, but eventually they all have to look for a larger pond.

And entrepreneurs know this: most European apps launch in several languages from the get-go, virtually every incubator in Paris is English-mostly, if not English-only, and everyone's looking West at Silicon Valley. When British teenager Nick D'Aloisio sold his startup Summly to Yahoo, it was huge news here too because that's the dream: put all your sweat and tears into a startup, then hopefully give it its chance (and yourself a well-deserved payday) in an acquisition.

Pierre Kosciusko-Morizet cofounded the French e-commerce site PriceMinister and sold it to Japanese giant Rakuten in 2010 while remaining CEO. Today, like many here, he feels like "the laughing stock of the global Internet" (French source):

It's simple. Since our acquisition by Rakuten:

• the marketing budget has doubled;
• the number of employees has doubled;
• the amount of business has tripled;
• the size of our offices was multiplied by 2.5.

We were able to join a global group and that saved us. If we'd remained French, we would have died.

What Next for Dailymotion?

The French tech community is left reeling. A few months ago, the government instituted a two-third tax on capital gain that left many would-be founders thinking "Why bother?". Investment plummeted, entrepreneurs rebelled and the government eventually canceled the tax. It spent months trying to regain the trust of the business community, indispensible to the country's economic recovery. Back to square one. Pierre Kosciusko-Morizet again:

It's hard to talk with foreign investors when our government ministers are telling them: 'Go home, we'd rather live in autarcy.' We're sending a terrible message.

So where to now? Orange CEO Stéphane Richard did try to save the deal, reminding everyone that Dailymotion is his to control, not the government's. But it looks like Yahoo! is definitely spooked. Marissa Mayer will find video technology elsewhere. The French government insists it had to defend the superior interest of the State and the company, while Mr. Montebourg and Pierre Moscovici, Minister of the Economy, fight it out over whose responsibility the fiasco really is.

Dailymotion has grown all it can here. It has requested a measly 50 million euros over four years to grown internationally and its local investors don't seem too eager. More than money, it needs networks and room to grow internationally if it hopes to survive in the shadow of YouTube. And first, it must absorb the blow.

Not without humor, Dailymotion EVP Martin Rogard changed his Twitter bio to simply say: "Minister for Productive Recovery" (the Harry Potter-esque name for Mr. Montebourg's office).

Meanwhile, French entrepreneurs are left pondering: Why bother?

Photo credits: screen captures from Dailymotion.com and Twitter.com.