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The SME instrument: tips & tricks for greater success

Since its 2014 launch the SME instrument has attracted applications from across Europe. But the quality is low, with only 12% passing the quality threshold. Bernd Reichert, head of unit at the Executive Agency for SMEs, offers tips for success

Bernd Reichert, head of unit at the Executive Agency for SMEs
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The Commission is receiving many applications for grants from its SME instrument, but only 12 per cent are meeting the criteria for commercialisation potential. The remaining 88 per cent come from SMEs that have potentially good ideas but are unlikely to succeed. “They haven’t thought about the market, the competitors, and about what customers are thinking,” said Bernd Reichert, head of unit at the Executive Agency for Small and Medium-sized Enterprises (EASME). 

Of the 12 per cent of proposals that pass the quality threshold, around 60 per cent are funded. However, for certain topics, all projects above the threshold have received funding. For example, phase I projects in healthcare have been all funded so far. 

Given this, there is certainly room for further improving the overall quality of proposals. “Since the very beginning we received a lot of fantastic ideas but people have no idea how to commercialise them,” Reichert told Science|Business. 

For Reichert, this is part of the European dilemma. “We have fantastic ideas but we are fairly bad at commercialising and bringing all these wonderful ideas to the market,” he said. European research projects often end up being commercialised in Japan, the US or in other countries, and the SME Instrument is intended to stop this happening. “We want to focus on supporting companies that want to bring ideas to the market and reward them for their courage,” said Reichert. 

Although the current success rate of between 6 and 10 percent looks low Reichert noted a higher success rate would require more funding. “If [the SME Instrument] were to fund all the 8,200 applications we received, we would need a budget 10 times higher,” he said. “This is not an option,” he said. However, the Commission does want to see the number of failed applications triggering a general discussion about why Europe has a hard time bringing ideas to the market. 

The instrument is open to anyone, but many applicants do not have the potential to succeed and maybe they never will, argues Reichert. The Commission cannot, “change people’s eagerness to apply for something they’re not fit for,” he said. 

Resubmit

If that sounds overly negative, there is light on the horizon. Many rejected projects come from university spin-offs with little business expertise. However, getting the thumbs-down can spur these companies to revise their projects and resubmit. “It seems that rejection offers a good incentive, and many companies start thinking about commercialisation,” said Reichert.

Reflecting on a rejection helps SMEs to rethink their strategy and focus more on the business aspects of their project. “Resubmitted proposals are at least twice as successful,” Reichert noted.  

Focus on the business plan

The evaluation panels involve external experts in investment and venture capital. As a result the evaluation process, “is very much simulating an investor decision,” said Reichert. Money coming through the instrument can be seen as an investment, except that it is non-dilutive and the Commission does not expect a direct return. Rather, “the return on investment [is] more jobs, growth, turnover, more tax,” Reichert said. 

Given this, proposals should be structured as a business plan that is investor-ready. Then, even if unsuccessful, applicants can use their 10-page application when seeking funds from banks or venture capitalists. The proposal will, “answer the questions [private investors] will have anyway,” said Reichert.  

Evaluation & feedback

The evaluation process is slightly different from the Framework Programmes and applicants who are used to how things worked before Horizon 2020 are complaining of insufficient feedback under the SME instrument.

Evaluators now give detailed feedback on all applications, including those which do not pass the threshold. Each proposal is graded on 21 items via a 5-step qualitative scale that ranges from ‘fair’ to ‘excellent’. This way, applicants know which items have not been successfully covered by their proposal, though it is their job to figure out how to address these items correctly. Applicants can look for professional advice from private consultants, but the Commission does not offer any advice besides the qualitative evaluation, noted Reichert.

In assessing impact, the Commission does not look at the number of jobs a project plans to create, or what economic impact the SME will have. “The most important criteria for impact are the SME’s ability to bring a product to the market and to present a sufficiently ambitious development strategy,” said Reichert. 

It is interesting to note that the evaluation process is relative to the overall quality of all projects. This means an average proposal can get closer to the quality threshold, or even pass it, if the rest of the proposals are mediocre. An evaluator might say “I am not really convinced [….] but it is not too bad today because everything else is just horrible, so I will give you a mark which is fairly close to the threshold,” said Reichert.

Following this logic, weaker proposals can be funded if the competition is not high enough. Happily, this is not the case so far with the instrument. The Commission is, “receiving such a high number of applications [which] I think is a good guarantee that the funded projects are excellent,” Reichert said.

Phase 3: Advice and access to risk finance

Other activities will assist SMEs in the third phase. They will be included in the 2016-2017 Horizon 2020 Work Programme. The Commission is working on the finer details, but the intention is to support companies that get passed the first two phases of the instrument by offering access to finance, customers, and public procurement. 

The Commission will help these companies to get in contact with investors, venture capitalists, and public procurement organisations, to generate more private investment. This third phase will be a “quality stamp,” said Reichert.

Before starting the roll-out of the third phase the Commission needs a solid portfolio of companies. “We need to have success stories, statistics and a portfolio of high potential companies, if we want to be taken seriously,” Reichert concluded. 

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Related subjects: EIB, SME, Horizon 2020, InnovFin