The History of Issues with the EIC Fund

Introduction

What is the EIC Fund?

The European Innovation Council (EIC) Fund is the investment vehicle of the EIC Accelerator programme - the European Commission's flagship innovation funding programme. With a budget of €3 billion from 2021-2027, the EIC Fund is positioned to be one of the largest deep-tech venture capitalists (VCs) in Europe during this period. Through the structure of the fund, a minimum of €3 billion of private funds will be invested alongside the EIC Fund during this period. The EIC aspires to crowd in a further €30bn-€50bn as one of its six strategic goals.

The EIC Fund is a venture capital fund owned by the European Commission (EC) established to make direct equity investments in companies with breakthrough technologies. The Fund usually targets minority ownership stakes (from 10 to 20%). Furthermore, it participates in direct equity investment ranging between €0.5 million to €15 million in innovative companies that pass the rigorous EIC Accelerator selection process. The Fund invests on a matching (1:1) basis alongside a syndicate of lead investors from the private market.

EIC Fund Investment Gap: Selected Companies vs Signed Deals

The investment gap refers to the difference between the number of companies that have been selected for equity investment by the EIC Fund and the number of companies that have signed a deal. There is limited public information on the number of companies that have signed a deal with the EIC Fund under Horizon Europe. This data is available for companies that signed deals during the pilot phase during 2019-20. Yet only 39.5% of the signed deals during the pilot phase have been made public. Although there are multiple reasons behind this gap, our survey results may provide insight into some of the reasons. 

Start-ups and SMEs that have been selected for equity investment have faced waiting times of greater than one year. The lack of funds has put many companies at risk of closure (source: Sifted). The EIC Fund has faced many criticisms for its bureaucratic operations and slow investment process. 

The EIC Fund investment gap at a glance

Past Issues with the EIC Fund

Introduction

The EIC Fund was incorporated in June 2020 and operational in September 2020 during the EIC pilot phase (2018-20). Since the creation of the EIC Fund under the Horizon 2020 programme, 341 companies have been selected for equity investment in the form of blended funding or equity-only funding. However, only 89 of these companies have managed to sign a deal with the EIC Fund. Why are companies having to wait for months and months to get their money?

The EIC Fund and EIC Accelerator have struggled to meet their deadlines and expectations as outlined in the EIC’s KPIs document, putting many start-ups on the verge of collapse. Funding delays have split over from the EIC Accelerator pilot phase to the fully-fledged EIC Accelerator and start-ups are still waiting for their money. The EIC announced in November 2022 that it had signed 2 more agreements in addition to the first deal signed in June 2022. In the announcement, the EIC stated that 35 decisions were made. These announcements were made months after the EIC’s initial promises. In earlier news releases, the EIC announced that the backlog of deals would be cleared in the summer following the appointment of a new external fund manager. Alter Domus was appointed by the EC as the new external fund manager in September 2022, many months after the expected deadline in June 2022. 

Media Commentary

The delays during this programme have been followed closely by the likes of Sifted EU and Science Business. A summary of their coverage as well as coverage from other sources can be found below:

 EU start-ups in limbo as Commission dithers over European Innovation Council equity fund, Science Business, 10/05/2022

The article highlights that delays are affecting companies selected for investment by the EIC Fund. Many companies selected during the June 2022 cut-off have faced waiting times greater than one year, and are yet to receive investment. Only 3 companies have signed an equity agreement with the EIC Fund since the full launch of the EIC under the Horizon Europe Programme. 

The article mentions how the implementation issues and delays were rooted in the EIC's lack of capacity and expertise to manage hundreds of potential equity investments. The anticipated EIC Accelerator cut-off in January 2022 (the first under Horizon Europe) was delayed due to problems with the adoption of the EIC Work Programme in 2022. 

 EU’s startup accelerator fund hit by delays, Politico, 17/05/2022

Similar to the article above, this article highlights that delays are affecting companies selected for investment by the EIC Fund. Companies are facing uncertainty over hiring decisions and scaling up. The reality is that startups are "...dealing with the consequences." of not receiving their money. 

Documents seen by Politico have blamed  IT problems and internal discussions with the EC as the cause of prior implementation delays. 

Parliament to investigate issues plaguing European Innovation Council, Science Business, 07/06/2022 

"The key problem is that the Commission decided it had neither the time or expertise to manage the fund and delegated it to the European Investment Bank (EIB). That decision was met with a backlash from member states which had negotiated different rules for the EIC,  but in February they caved in and allowed the Commission to proceed with transferring management to EIB.

Despite the agreement, things have not run smoothly since, reportedly, due to internal fights within the Commission over how to proceed, and the time required to complete negotiations with EIB. That will take until 30 June, according to the EIC’s latest statement."

Inside the EU’s stalling startup investment scheme, Sifted, 6/07/2022

In addition to leaving startups with uncertainty, the delay in equity investment by the EIC Fund has put many startups at risk of closure. The article provides insight into a founder's experience with the EIC Fund and how the delay affects them.

Commission says delays in European Innovation Council equity funding are about to end, Science Business, 29/09/2022

The EC announced the appointment of a new external fund manager in late September. AlterDomus will be responsible for making key investment decisions regarding the equity investment aspect of the blended funding in accordance with the EIC Fund's Investment Guidelines. Following a delayed process, the EIC states that the "first investment decisions are expected to be taken during October...". As of December 2022, 35 investment decisions have been taken and three companies have signed investment agreements, up from just one in June 2022. 

The article highlights how this is just a transitional arrangement, suggesting that this indirect management is not the final form of the EIC Fund: "Arrangements for the permanent management of the fund are expected to be in place by the end of the year". 

EU deeptech fund speeds up investments but many startups still left waiting for funding, Sifted, 17/11/2022

The article provides insight into the current status of the EIC Fund. Although the EIC has managed to move forward with its grant payments, 149 companies selected for investment are still waiting for a decision.

Given that there have only been three signed deals, the EIC has a clear backlog of deals that need to be finalised. The EIC Fund claims that it is “fully engaged to deal with the backlog”. 

Our Independent Data (Surveys, Statistics)

At Winnovart, we are currently researching the impact of blended funding programmes on the European innovation & investment ecosystem. We believe that blended funding (mixing grants & equity investments) is the most interesting development in the European grants-funding ecosystem for many years, promising to reshape its future.

We are looking to find out the general experience of selected companies and their private/lead investors with the EIC Fund. This will help us understand the reasons for the current status of the programme, as well as the significant gap between the number of companies selected and the number of signed deals.

EIC Fund beneficiaries' experiences with the EIC Fund

Initial experience with the EIC Fund: 55% of respondents only faced a few obstacles, reporting a positive experience with the EIC Fund. 40%, on the other hand, faced many obstacles during their process with the EIC Fund however, out of that 40%, 5% believed that this caused a negative impact on their company. 

Key challenges that our survey respondents faced: 75% reported that the key challenge they faced was the duration of the entire Fund investment process. Interestingly, 95% of respondents found that the EIC Fund was lacking in terms of communication, support and transparency. 

Click here to see the full results. 

Private investors' experiences with the EIC Fund

Key challenges for Private Investors when engaging with the EIC Fund's blended finance programme: A clear cause of concern for 33% of private investors is the duration of the investment process. Furthermore, 25% of respondents believe that the complexity of the due diligence process is a challenge. 

Interest in getting involved/continuing involvement with the EIC Fund: 20% of respondents expressed interest in getting involved/continuing involvement with the EIC Fund. 40% of respondents expressed interest in engaging with the EIC Fund so long as it suits their investment thesis (e.g., geography, size etc.). Lastly, 40% reported that they are not interested in engaging with the EIC Fund due to its complex and time-consuming nature. 

Click here to see the full results. 

Read more: EIC Fund Investment Gap, EIC Fund Statistics & Insights, European Commission (EC) Appoints a New External Fund Manager