MEPs to vote on withholding €811M funding from the European Innovation Accelerator in 2023

12 Jul 2022 | News

After months of waiting for the Commission to fix internal management issues and start distributing equity funding to start-ups, Parliament’s research and industry committee is moving to force the issue

Christian Elher, MEP. Photo: Science|Business

The European Parliament is to vote on holding off financing the European Innovation Council’s (EIC) Accelerator next year, as the European Commission scrambles to restructure the EIC Fund and unlock delayed grant decisions.

The Parliament’s industry and research committee (ITRE) will vote on Wednesday on amendments to the EU’s 2023 budget, including one proposal from Horizon Europe co-rapporteur Christian Ehler to “put in reserve” 70% of the funding for the EIC.

Ehler says he expects most of his fellow MEPs on ITRE to support the vote. Scrutinising the work of the Commission, after all, is the Parliament’s job, he noted. But the final decision won’t be taken this summer. A plenary vote on the EU budget is due in September.

If the vote goes through and member states also agree, EIC would have to halt calls until remaining issues are resolved. That would freeze around €811 million in grants and equity financing for European deep tech start-ups until the Commission settles its internal disputes over how to manage the EIC Fund.

Ehler tabled the amendment to withhold next year’s financing in frustration over a disagreement within the Commission about how to manage the equity financing part of the EIC programme. This is the first time the Commission has run a programme that involves taking stakes in companies, and there is disagreement about how to handle the risk attached to this.

The logjam has held up the funding for start-ups which applied for blended financing – a combination of grants and equity investment. Many spent time and money applying for support, were told they had been successful, and thinking they had funding in hand, started projects - only to be left cash-strapped months later.

“The Commission has not been able to implement the EIC Accelerator for over a year now, because of its internal fights,” said Ehler. “By putting the budget in a reserve until the Commission is able to implement the projects, we prevent that applicants are going to spend time and money on calls that might not be implemented as planned.”

A Commission spokesman said it takes note of Ehler’s amendment and admitted that the signing of grant and investment agreements for companies selected in 2021 has been delayed due to hurdles in restructuring the EIC Fund and other technical challenges. However, “all delayed grant decisions for companies that requested blended finance from the 2021 cut-offs are now expected to be taken by the end of summer,” the spokesman said.  

Xavier Aubry, board member of the European Association of Innovation Consultants, an industry association whose members advise on grant applicants, says the management issue is temporary. He is worried about the Parliament resorting, “to the nuclear option to try and resolve the situation created by the European Commission.”

Fixing the logjam

The Commission infighting began last year. Reportedly, the EIC realised it did not have the expertise to manage a big pool of equity investments, leading the Commission to decide to hand over management to the European Investment Bank (EIB), which does have the necessary expertise and manpower.

The sudden change in how the fund is run did not go down well with the member states at first, whose permission was needed. But in February they caved, approving the handover.

“The direction now, and the discussion is nearly ready, is that the EIB would oversee the EIC Fund technically, but the EIB would take up the decisions made by the Commission,” the Commission’s research chief, Jean-Eric Paquet, said at the time.

The Commission notes that, under Horizon Europe legislation, it can use external fund managers for disbursing EIC blended finance. “The Commission is now working to set up the indirect management architecture as soon as possible,” the spokesman said.

Yet, the money did not start flowing. According to reports that was because the Commission could not agree on the terms internally. The directorate general for budgets has a cautious attitude to the equity investments, which is said to be at odds with the research directorate’s ambitious vision for the Accelerator programme. The Commission has kept the internal talks under wraps.

In recent weeks the Commission has been working through the logjam. It made its first equity investment in a French microprocessor start-up, SiPearl, in June. “Further investments will follow once the current restructuring of the EIC Fund is completed, with the appointment of an external fund manager of the EIC Fund in the coming weeks,” the Commission spokesman said.

According to the Commission, 74 start-ups were selected for funding after the March cut-off this year, of which 38 requested blended finance or equity only. Another 36 companies requested grant funding. The Commission estimates that “in most cases” companies will get the grant funding within five to eight months, while the 2022 equity investments should be unlocked “during the autumn”.

The delays affected the 102 companies that were awarded financing in 2021, the first year of the fully-fledged EIC programme under the Horizon Europe research programme, with 30 companies that requested blended financing in the first Accelerator call in June experiencing the longest delays.

Start-ups have complained that the big problem is the lack of transparency. Back in May, one company described the wait for financing as a wait for a train that keeps getting delayed over and over again.

Ehler took up the case of the EIC Accelerator last month when he announced he will undertake a Parliament inquiry into the issues plaguing the new and ambitious programme.

The delays were the most serious issue raised during the consultation but Ehler acknowledged the requirement to find co-investors to match EIC equity was also brought up by stakeholders.

“While it is a good policy for the EIC Fund to leverage the expertise of the market when making an investment, this should not be a hard rule. Furthermore, it should be crystal clear for applicants from the very beginning whether or not they are expected to raise matching investments,” said Ehler.

To speed things up, Aubry says the EIC should loosen its requirement for a company promised Accelerator funding to find co-investors before it can unlock EIC equity financing, a condition that was introduced during the pilot phase of the programme.

However, even if this rule is kept, Aubry hopes to see faster investment processes to match those of private investors. “It is currently unclear as to whether the appointment of a fund manager and the planned move to indirect fund management by the EIB will bring improvements there, if any,” said Aubry.

What the Parliament wants

The Parliament wants the management issue resolved, but what this means in practice remains to be seen.

“As the Commission has not informed the Parliament even on its interim solution, I cannot comment on what should be reversed or not,” Ehler told Science|Business. The solution, he notes, is “a credible long-term plan that respects the legislation and the intentions of the co-legislators.” This means, in the long-term, establishing an independent agency for the EIC.

Ehler stressed that the budget directorate should not undermine the plans of EU legislators, as defined in the Horizon Europe legislation. These mandate that the EIC Accelerator, managed by the Commission’s start-up agency, EISMEA, and its own fund, make risky investments in promising start-ups.

“It might stipulate certain framework conditions it sees as necessary, but if its bureaucratic rules prevent the implementation of legislation that was adopted by the co-legislators, it is overstepping its authority,” said Ehler.

Editor's note: This article was updated. Ehler's proposal would see a 70% cut of the EIC budget for 2023, representing the full budget of the EIC Accelerator. 

Never miss an update from Science|Business:   Newsletter sign-up