Member states break EIC work programme deadlock

EU member states have voted to break the political deadlock that has been holding back the European Innovation Council’s (EIC’s) 2022 work programme.

That means details of programme should be published by 8 February, allowing hundreds of tech companies to apply for capital they need to grow in the EU and global markets.

Start-ups and innovators have been waiting for the EU’s new innovation fund to kick off for the year. The first calls were expected to launch in January but the infighting over the work programme derailed the plans. The deadlock has also affected companies promised equity funding in 2021, which are also waiting for the capital to start flowing.

The delay was a result of political disagreements about the direction of the EIC and its big equity investment fund.

The hold-up involved a dispute over how to manage the fund. Problems started, sources involved in the discussions said, 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 member states did not like the idea of downgrading the EIC’s role in handling its own equity financing. To break the deadlock, French delegates have now kicked the can down the road, putting forward a compromise deal to extend the old rules for 12 months while the policymakers look for a solution.

On Monday, officials voted to support that proposal, giving themselves another year to deliberate the future of the fund.

Defeating the object

That was not before the turmoil attracted the attention of the European Parliament, with critics saying removing EIC’s direct control over the new equity fund could defeat the object of setting it up in the first place.

"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 [EU] 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 German MEP who was Horizon Europe co-rapporteur, commenting on the delay.

The EIC introduced equity funding for start-ups as a pilot in 2019, and officially launched the EIC Equity Fund in June 2020. The fund 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 formed 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 of the proposal to switch the fund management to external venture capitalists say this would affect its style – leading to 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, commenting on in advance of the vote to postpone the change for a year.

Others believe outsourcing management of the fund is simply good governance of public money – and essential to prevent the Commission’s largesse from distorting the private investment market.

A change of direction

Under the current rules, which will now hold for another year, after evaluation of start-up pitches by external experts including the European Investment Bank, it then falls to the EIC Fund Board of Directors, headed by EIC chief Jean-David Malo, to have the final say on which get equity financing, on what terms, and how much.

Handing this over to external investment partners risks a potential conflict of interest and would also incur management fees, critics say.

With the change rejected for now and the work programme for 2022 voted through, it remains to be seen how the discussion around the future of the EIC Fund will evolve.