EU start-ups in limbo as Commission dithers over European Innovation Council equity fund

The European Innovation Council’s (EIC) Accelerator funding for start-ups continues to be held up as the Commission’s directorates fight over how to manage the new equity fund.

The delays are affecting companies selected to receive ‘blended finance’ – a mix of grant and equity funding – following the June cut-off date last year, the first under Horizon Europe. But the impact may soon be felt by those next in line, which were selected for funding following the October cut-off.

A week ago companies that applied last year were told in an official letter seen by Science|Business that the European Innovation Council and SMEs Executive Agency (EISMEA), the EU agency managing the grant, “cannot provide you with a firm date for the signature of your contract.”

The cause of the delay is a continuing disagreement over the management of the EIC fund, which gives out the equity portion of the blended finance, a new type of Horizon Europe funding for companies.

Back in February, the Commission indicated it would switch management of the fund to the European Investment Bank, unlocking the funding. But equity money is yet to start flowing, while those companies that applied only for grant financing had signed their agreements by April.

The aim of the EIC is to fund promising EU start-ups to scale up new products: leaving them in financial limbo is having the opposite effect.

“The delays in the implementation of the EIC Accelerator are devastating to the start-ups involved and the Commission is gambling away its credibility in the European start-up scene,” Christian Ehler MEP, who was instrumental in shaping the new EIC programme, told Science|Business.

Ehler said the Parliament could move to take away funding from the EIC’s flagship start-up programme, which is to receive around €7 billion in funding under Horizon Europe, if the problems persist.

“The Commission must solve this right now and needs to present a clear plan for preventing this for the future. If we do not have this plan in time, I will push in the annual budgetary procedure to defund the EIC Accelerator to prevent start-ups spending time on counterproductive applications,” said Ehler.

Managing equity investments

EIC has had a rocky start under Horizon Europe, following its successful three-year pilot phase in Horizon 2020. The problems started in the beginning of last year when the EIC realised it does not have the capability to manage equity investments in hundreds of companies itself. The Commission asked the member states for approval to hand management responsibilities to the European Investment Bank.

The change of direction baffled member states, which were reluctant to approve changes to a programme that had been proclaimed a success in the pilot phase under Horizon 2020.

In the end, an agreement was reached in February, unlocking the EIC’s work programme for 2022 and funding for the companies.

But the directorate for budget, DG BUDG, reportedly continues to be concerned about the risks attached to investing EU money directly in companies, an approach that not had been tried before the EIC was set up.  

Proponents of the original vision of the EIC as an investor that can take risks the private sector shies away from, see this as Commission’s inability to detach itself from bureaucratic tendencies.

“[The EIC] should be the spearhead to unlock the potential of deeptech startups. However, some parts of the Commission administration, primarily DG BUDG, are handling it as business as usual. This bureaucratic reflex is now threatening the EIC,” said Ehler.

It’s now up to the commissioners to break the deadlock. “It will take political leadership of [budget] Commissioner Hahn to break this reflex and move the EIC forward,” Ehler said.

The Commission did not reply to a Science|Business request for comment.

The stress of uncertainty

One small French start-up that employs around 20 people confirmed it has not received any funding yet after applying for the June cut-off date last year.

The company started the project that was due to be financed by the EIC in March, but with no clear date for the money to start flowing, it is now nervous about the future.

The start-up knew EIC does not move fast on equity funding but hoped the grant would come through in time. With a tonne of paperwork sifted through since being told it had been awarded a grant in October, the money is yet to land in the company’s bank account.

One of its executives says it feels like they’ve been taken hostage by internal ego fights at the Commission. “We’re in the middle of a fight, and there will be casualties,” he told Science|Business on the condition of anonymity. “If it continues for two months, we’ll have to take hard decisions.”

That may mean ending the innovation project the company embarked on in March, as well as letting go freelancers and staff working on it.

EIC staff have been professional in handling the situation but ultimately it’s not in their hands, the executive said. The company tried emailing three commissioners to enquire about the situation but has only received boilerplate replies.

The company compares the situation to getting to a station and realising the train is late by 30 minutes, then another 30 minutes, and so on, until it gets to 12 hours delay and there still isn’t a train. It’d be better to know the train would be 12 hours late at the start, the executive said.

Timeline

There have been three official communications to companies seen by Science|Business, and a number of unofficial ones signalling delays.

At first, in the original notification in October, all winners were told the grant money would start flowing within two to four months. This would have meant the agreements were in place in January. But January came and went, without deals signed.

In March, once the work programme for 2022 was out and the problems seemed to have been temporarily resolved, companies were told the grant-only and grant-first contracts (meaning the equity is contingent on the company improving its product with the help of a grant first) would be signed by the end of March, as was the case.

The rest were meant to follow in April, but another letter in May, indicates the delays are indefinite, but with hopes to sign agreements by early June.

“While we had until recently foreseen to sign your contract at the end of April, more internal discussions in the European Commission on the appropriate procedural authorisation of the contracts including blended finance (being the first of this kind in Horizon Europe) are unfortunately delaying this timeline,” the letter said.

Xavier Aubry, board member of the European Association of Innovation Consultants (EAIC), says many are confused why signing grants has been delayed by the fight over equity financing. The two, after all, are managed under different instruments.

In the end, uncertainty remains - and that’s the biggest killer for companies. “This situation leaves the selected companies cash-strapped, at a time when an adverse macroeconomic situation is preventing them from accessing alternative short term financing options,” EAIC said.

For Aubry, this shows the EIC has misunderstood its mission. “The instrument remains a great idea. It’s the best way to support high risk companies in strategic areas. They are trying to fund the next BioNTech, and it’s laudable, but they haven’t been able to match the pace required by the startups,” he said.