Management of one of Europe’s biggest investment funds is at risk of capture ‘by bureaucratic tendencies,’ MEP Ehler warns. Decision expected by Monday, sources say
With Horizon Europe formally launched, the next move for the European Innovation Council (EIC) should be getting its 2022 work programme detailing the calls, their budgets and scope approved - and the calls launched. But this appears to be caught in political infighting about the direction of the innovation agency, sources say.
A month into 2022, start-ups and researchers are still waiting for the EIC to kick off the year. By Monday, officials expect to vote to break the deadlock and allow the EIC’s work on its big equity-investment fund to proceed. If the vote goes well, the work programme should be out by 8 February – allowing hundreds of promising tech companies to get the capital they need to grow and succeed in the EU and global markets.
The hang-up involves a dispute over how to manage the fund. Problems started, sources involved in the discussions say, when the European Commission’s directorate general for budget proposed switching the Commission-run EIC Equity Fund from direct to indirect management, due to concerns about the risks attached to the Commission making equity investments.
The turmoil is starting to attract the attention of the European Parliament. "The EIC seems to be at risk to be captured by bureaucratic tendencies within the Commission to avoid any manner of risk in investments using Union funds. If this view prevails, the EIC will fail and with it a key effort for Europe’s global competitiveness will fail,” said Christian Ehler, a leading German MEP who was Horizon Europe co-rapporteur.
The EIC introduced equity funding for start-ups during its pilot days in 2019, and officially launched the EIC Equity Fund in June 2020. The high-risk equity funding is a key component of the new innovation agency and the crown jewel of its Accelerator programme for start-ups. With a €7 billion fund of “blended finance” including grants and equity, it is poised to make the Commission a big-shot tech investor in Europe.
The EIC was devised by the Commission to address Europe’s innovation scale-up problem. While Europe has great science, there’s often said to be insufficient financing for translating this into start-up companies with the means to grow. Many fail as a result, or end up relocating to the US to source the capital needed to scale. The EIC Accelerator’s brief is putting money into high-risk tech start-ups that struggle to find private investors willing to commit – and it’s the first time the Commission is buying company shares.
Critics say the proposed switch in fund management could affect its style – leading it to take a more conservative attitude towards investment decisions than EU legislators initially envisioned. “The proposed new approach violates both the spirit and the letter of the EIC legal base,” said Xavier Aubry, board member of the European Association of Innovation Consultants (EAIC), whose members advise numerous EIC grantees.
But others say the change is simply good governance of public money – and essential to prevent the Commission’s largesse from distorting the private investment market.
Whatever the right answer, the argument has been a factor delaying action on the fund, and has left some small companies hanging. In December, the Commission announced that the cut-off date for 2022 Accelerator applications, originally planned for January, is being delayed. And many companies that were promised equity funding in 2021 are also waiting for the capital to start flowing (though many have received grants.) There are also frustrations among the 159 companies awarded in the EIC’s 2018-2020 pilot phase, under Horizon Europe’s predecessor-programme. Of €637 million promised, as of today, only €172.5 million has been disbursed, a year after the pilot programme ended.
On 11 January, a Commission spokesman told Science|Business: “It is correct that it is taking us longer than expected to set up the implementation arrangements for equity financing under the Horizon Europe legal base. These delays are a consequence of the transition from the Horizon 2020 to the Horizon Europe.”
A change of direction
By mid-January, proposed new clauses in the work programme circulating among EU officials said “investment decisions (and their related conditions and management) are taken by EIC Investment Partners.” This, critics say, would essentially see the EIC delegating final decisions on the terms of funding for companies to these partners. Under the current rules, following evaluation by external experts including the European Investment Bank, the EIC Fund Board of Directors, headed by EIC chief Jean-David Malo, has final say on who gets the equity financing, on what terms and how much.
The change would give the investment partners – as-yet unnamed publicly – a bigger say in the fund decisions, argues Aubry. Further, he says it will increase “the administrative expenses and fees from 4% to 10% of the equity investment budget, in order to support these new investment partners.”
“The European Commission cannot make the EIC support dependent on the interest of private investors to join, and transform the objective to crowd them in, into a pre-condition,” said Aubry. “The European Commission should remain the single decision-maker with regards to EIC equity funding.”
The proposal for the changes was reached after long internal deliberations between the Commission’s research and budget directorates. The Commission then presented the amendments to the member states, who must green light the work programme before it is published.
The member states and the Commission had a meeting 26 January, but the deadlock persisted. French delegates suggested a compromise to extend the EIC pilot rules for another year while the policymakers look for a solution. A vote to move forward with the programme is expected “by Monday”, sources say. And for now no further meetings with member states are scheduled on the topic.