08 Mar 2018   |   News

EU should back growth companies, not the formation of start-ups, entrepreneurs say

Open letter calls for European Commission to trust outside investors with picking the best companies to fund

Open letter calls for European Commission to trust outside investors with picking the best companies to fund

Entrepreneurs are calling on the European Commission to re-define its role in the innovation game, by out-sourcing more funding decisions to investors, in an open letter to Commission president Jean-Claude Juncker and six commissioners, including Carlos Moedas, the EU head of research.

“EU programmes should not directly support start-ups [or] innovators,” says the letter, published on Monday, and signed by 18 European CEOs and company founders.

Rather, support should be for start-ups in the growth phase, that is, companies which have developed their technologies to the point where they are ready to scale-up, rather than the early stage start-ups.

Among the signatories is tech luminary Frédéric Mazzella, founder and president of French online car-share company Blablacar, considered one of the few great European internet successes.

The Commission runs several multi-million-euro programmes aimed specifically at small companies, such as the SME Instrument and the Fast Track to Innovation scheme.

However, the CEOs write, the Commission should restrict its role to “facilitating and fostering networking and international outreach to other regions’ ecosystems” and to making Europe more attractive for investors and talent.

Noting only 4,200 tech companies in Europe have been able to raise more than €1 million in growth capital, the CEOs say EU money should be given to venture capital funds, which are best-placed to pick which companies to back and to shape them for future investment.

Europe has “somewhat partially” filled the gap in seed and early stage financing the letter says. However, “Later stage growth financing, including access to IPOs and investments from pension funds and wealth foreign sovereign funds, still need to be significantly improved.”

If the Commission is to continue to put money into start-up companies, it should only do so as a co-investor with private funds and accelerator programmes. The letter points to the Israeli government agency Yozma, which matches private funding, as a role model.

Yozma was also highlighted in a recent report by Italian-American economist Mariana Mazzucato as an organisation from which the Commission could learn. 

The practice of public bodies subsidising companies or picking winners, is a source of controversy and debate. Proponents claim such subsidies pay for themselves in new jobs. Opponents say the majority of new companies fizzle and fail, and money is being given away.

Another school of thought argues for more fundamental and collaborative research funding for universities and research organisations, saying big companies should not get EU money.

In a review of several of the EU’s industry-focused competitions last year, Spanish MEP Soledad Cabezón Ruiz said, “It should be made clear whether big enterprises do require public research funding.”

Preliminary plans for the new European Innovation Council (EIC) suggest the Commission will continue to play a big role in directly funding companies. However, there may also be more matched funding.

Commission documents show how the EIC could be created in 2021 by reorganising four existing funding streams from the Horizon 2020 research programme into two parts.

The first, an instrument called the EIC Pathfinder would accept proposals from any legal entity, including universities, and issue grants up to €5 million. The expected outcome of this funding would be a new start-up or business plan.

Meanwhile, an EIC Accelerator would help to scale-up products in development by companies, with a tailor-made mix of grants, debt and equity. Funding would go up to €30 million, paid in tranches and banks, venture capital firms and public innovation bodies would be invited to co-partner projects.