The EIC Accelerator Blended Finance to Support High Growth SMEs in Europe

19/10/2020 |
EIC Accelerator Blended Finance
Image Credit: European Commission

A novel feature of the EIC Accelerator, inaugurated in October 2019, offers SMEs up to €17.5 million in combined grant and equity financing to scale-up quickly and effectively. What do applicant companies need to know and how can you obtain the new support? Read on.

In the end of 2019 the European Commission (EC) has announced its new EIC Accelerator Pilot Program, which will be tested over the next year and half across the EU and H2020 associated countries. The goal: supporting European SMEs and incentivizing them to develop “at home”, so the EU can compete with the USA and Asia’s markets.

Since the global economic crisis of 2008, Europe has seen slow growth in the creation of venture capital funding compared to other players on the global stage. The investment gap for companies between an early-development stage and market uptake has become an issue, due to a scarcity of private investors willing to support high-risk, high-tech businesses. As a result, despite channeling significant amounts of grant funding to research projects in Europe by the EC and national schemes, very few projects subsequently manage to attract equity-type financing and reach the commercialization stage.

This financial gap, which in 2016 accounted for as much as €32 billion when compared to the investment available for the U.S.A, is what the EC aims to reduce. The EIC Accelerator Pilot Program is one pillar they will introduce to do this, via a blended finance option.

The EIC Accelerator Blended Finance to Support High Growth SMEs in Europe
Image Credit: Invest Europe, NVCA / Pitchbook

What is blended finance?

According to the EIC Accelerator Pilot Program, blended financial instruments are defined as: “A combination of grant with equity, debt investments or insurance-like products from either the public or private sectors”. 

Blended finance is usually for SMEs who need extra support for commercialization activities. Such activities could include product/service development, trials, prototyping, validation, demonstration and testing in real-world conditions, as well as market replication.

In order to stimulate investment for European SMEs, the EC wants to include a blended finance option in its new EIC Accelerator Pilot Program to be piloted until 2020 with early-adopter companies, and hopefully later to be rolled out under Horizon Europe from 2020 onwards.

The advantages of blended finance include: 

  • Thanks to the private equity component, provide a stronger support to the beneficiary company with market deployment activities that may not be supported by any grant at EU or national level due to State Aid rules, hence de-risk even more innovation and bridge the “valley of death”. 
  • Ability to involve public and private investors, thereby increasing the total amount of financing to projects as compared to support through grants only. 
  • Ability to gain a valuable partner (private investors) supporting the company’s go-to market efforts through mentoring, strategic advice and access to a broad network of partners. 

EIC Accelerator Fund 

As part of the EIC Accelerator Pilot Program, the EC has created the EIC Accelerator Fund (EIC Fund) with the support of the EIB Group (EIB). 

The EIC Fund will provide capital in the form of equity or quasi-equity (which will be blended with a grant component) to EIC Accelerator Final Recipient companies with potentially market-creating innovations, thereby contributing to bridge the gap between innovation and market take-up. 

The addition of blended finance as a possible option means that companies can choose if they want to apply for this as part of their EIC Accelerator proposal. 

The EIC Fund is expected to be established under Luxembourg law, incorporated as a public limited liability company. The structure of the fund will be set-up by the EIB Group, which will also act as the EIC Fund’s investment adviser, managing the due diligence process. The EIC Fund will be internally managed by a board of directors composed by representatives appointed by the EC. 

“The EIC Fund – the first of its kind – will help our most innovative start-ups and SMEs rapidly bring their innovative products to European and global markets, while growing their companies and talent within the EU. Currently so much economic growth and job potential is lost because these companies are seen as too high-risk for the private venture capital market.”

Mariya Gabriel, Commissioner for Innovation, Research, Culture, Education and Youth

Funding components and process

The EIC Fund will initially be composed of:

  1. A grant component managed by the EC.
  2. An equity component (an investment in equity or quasi-equity) operated with the support of the EIB Group as investment advisor. 

In its pilot phase (until 2020) the EIC Fund will have an initial budget of €100 million.

Candidate companies will apply to the EIC Accelerator grant and the blended finance option through a public call for proposals published by the EC. The EC will award a grant-only or also blended finance support. Following the selection, the EC will initiate the grant agreement preparation and in parallel, will channel proposals selected for blended finance to the EIC Fund for the equity component (due diligence, market assessment, negotiation of the equity agreement, etc.). 

EIC Accelerator (and former SME Instrument Phase 2) beneficiary companies could also choose to apply for the blended finance option after they have been awarded the grant-only. In that case, they will have to update their grant application to demonstrate they will reach TRL9 from TRL8 with the help of equity finance.

Technology Readiness Levels (TRLs) are indicators of the maturity level of particular technologies and are widely used in EU funding programs.They provide a threshold after which projects are deemed more and more mature, with higher probability of getting to the market. There are nine levels; TRL 1 being the lowest and TRL 9 the highest. 

Eligible applicants

The EIC Fund will focus on capital-intensive policy-priority sectors including clean energy, advanced engineering, life sciences, digital, space, climate action, future mobility and social innovation. 

Eligible applicants are for-profit SMEs, including start-ups and early-stage companies, established and operating in the EU Member States or associated countries to Horizon 2020, from any sector with typically a strong intellectual property component. 

The EIC Fund will usually invest in companies with no (or very limited) turn-over and negative EBITDA. Growth-stage companies are not within the focus of this pilot phase. 

Conditions of eligibility

Some conditions should be considered before submitting a proposal to the EIC Fund:

  • If your company is financed under the blended finance option, an appointed representative of the EC will become a member of the board of directors as a “silent investor”, owning up to, and no more than, 25% of your company’s shares.
  • This “silent investor” will be an observer, without interfering in the daily decisions of the company.
  • The “silent investor” will look after the interest of the EC and step-in if potential risks arise, such as the company or technology being transferred out of the EU.
  • The “silent investor” will also be ready to be substituted at any time by any alternate investor willing to buy its share at market price. 
  • If the company gives its consent, the EIC Fund will actively seek private investors to buy the EC shares.
  • There will be the possibility for founders to buy-back the shares from the EIC Fund once the company has developed and technology matures and agreed upon between the parties. 

Companies applying to the EIC Fund must also be aware that they will have to prove high capitalisation and operational capacity needed to match the blended finance solicited. Furthermore, they will be required to go through a financial due diligence, involving a close analysis on the real development stage of the project to ensure they receive the correct amount of blended finance.

Funding amount

The EIC Fund will allocate a maximum total funding (grants and equity) of €17.5 million to the EIC beneficiary company to bring their innovations to the market. The timing and conditions for disbursement in tranches will be negotiated and managed by:

  1. The EC for the grant allocations (between €0.5 and €2.5 million with the following split: 50% after grant agreement, 35% during the project, and 15% after the final report has been approved. The 15% will include a 5% guarantee).
  2. The EIC Governing Body, advised by the EIB, for the equity allocation (in the form of equity or quasi-equity, which will range between €0.5 and €15 million per company). 

Whenever possible, the EIC Fund will co-invest with other investors, such as VCs or corporate venture arms, to crowd in private financing and mobilise additional capital. The EIC Fund will form a community of pre-checked, trusted VCs and investors, mainly those involved in EFSI (Juncker Plan) and InnovFin, but open to any other willing to support the EIC. 

The process of matching with investors / mentors will be facilitated through a sophisticated digital platform solution. It will serve as a market test for identifying possible investors, co-investors or collaborators. The EIC beneficiary company will be presented with VCs that express the interest to invest. The digital platform is currently in the making but expected to be launched by January 1, 2021 in parallel to the new Horizon Europe program. An EU tender has been published to select a contractor operating the platform and matching EIC beneficiary companies with investors. 

The EIC beneficiary company will always have a final say in accepting or not an investor and may also look for and propose alternate or co-investors of its own. If no agreement can be reached, the EIC Fund will become the sole investor. 

Coaching and mentoring are directly provided by the EIC Fund to the companies and they account for 1% of the EIC Fund budget. 

The EIC Fund will target minority ownership stakes (from 10 to 25%), and up to a blocking minority in cases identified by the EC as of strategic interest for the EU. 

For the blended option, the EIC beneficiary company will sign a separate equity investment agreement, which will set out the terms and conditions for the equity part. 

Since the start of the EIC Accelerator Pilot in the autumn of 2019, a total of 102 start-ups and SMEs active in all technology intensive sectors (health, digital, energy, etc.) have been pre-selected for equity financing for a total of nearly €400m. Further companies will be preselected by the EIC Accelerator Pilot in July (in Green Deal areas) and November 2020. 

Investment/co-investment scenarios 

The EIC Fund will connect the EIC beneficiary company to the EIC Fund investor community ecosystem to propose co-investment opportunities. If the company consents, due diligence and negotiations will be performed by the co-investors. 

Following an assessment, the EIC Fund will classify the proposals for the equity component of the blended finance applications into 3 types of investment scenarios: 

  1. Scenario 1: market shows no interest in the immediate or near future – the EIC Fund will perform due diligence on the potential investee and will invest (using equity or quasi-equity instruments) on its own under standard terms. 
  2. Scenario 2: market shows immediate but partial interest in investing into EIC selected companies – the EIC Fund will invest but relying on the due-diligence performed by the potential co-investors. On behalf of the EIC Fund, the Investment Advisor will negotiate the terms with potential co-investors, including mentoring tasks, and will provide independent advice to the company on co-investment opportunities. 
  3. Scenario 3: market shows immediate interest in investing into EIC candidate companies – in principle no investment to be undertaken by the EIC Fund, which would leave the priority to alternate investment opportunities. The Investment Advisor will connect the potential investee to the investor communities. 

Due diligence

Applicant companies positively evaluated for blended finance will go through the grant preparation process and will in parallel undergo a separate due diligence processed by the EIC Fund for the equity component, where they will be asked for additional information regarding the company’s commercial viability. Therefore, the EIC Fund may invite the companies to face-to-face interviews and at the same time will check if there are co-investors on the market willing to take an equity stake in the company.

The final investment sum will be adjusted depending on the outcome of the due diligence performed by the EIC Fund and the availability of co- or alternate investors. The founders are free to negotiate and even reject the investment terms proposed by the EIC Fund.

The fact that the company may have identified its own investors does not preclude the company from receiving EIC Fund support, if risk is still considered as high and the EIC financing is needed to secure those investments. In fact, one of the central objectives of the EIC Fund is to attract co-investors even if they invest small shares or play a non-financial role to begin with (i.e. mentoring companies). Also these other co-investors will be subject to the due diligence process by the EIC Fund.

Forms of equity-type financial instruments to be used 

The financial instruments used by the EIC Fund will take the form of equity or quasi-equity investments. These instruments are summarized as follows: 

  1. Common shares: represent an ownership in a company, including an interest in earnings and dividends. They may be voting or non-voting and may be divided into classes with special voting privileges to each class. 
  2. Preferred shares: represent a hybrid i.e. an equity interest with debt-type features such as seniority at dividend payments and liquidation proceeds. 
  3. Convertible instruments: like convertible loans, have a convertibility feature attached to a debt instrument that is attractive to the issuing company, since they bear a lower interest rate and postpone dilution. They offer flexibility to investors allowing them to shift the risks and rewards of their investment to some point in the future after the initial investment. 
  4. Other equity-type instruments: those appropriate to achieve the objectives of the EIC Fund. 

Duration of the investment and exit strategy 

The EIC Fund will invest capital, with a long average perspective on return on the investment (7-10 years) with a maximum of 15 years. There are no predefined levels of returns sought – the EIC Fund objective being “impact investment” rather than maximizing return on the investment. 

The exit strategy for each company is to be set on a case-by-case basis given the specificities of each business plan, industry, expected holding period as well as the development of the companies compared to the initial milestones set. Exit routes may include IPOs, management buy-outs, secondary sales or liquidations. 

EIC Accelerator projects benefiting from blended finance will be exempted from Horizon 2020 obligations on intellectual property (except if the operation is terminated by anticipation). Within applicable national legislation, the investee and co-investors should be given maximum autonomy regarding IP management, to the best interests of the deployment of the innovation and the companies development, as to attract further investments to scale-up and allow for an effective exit strategy.

Application process

Proposals granted ‘Go’ decision for the EIC Accelerator will be directed to the EIC Fund that will initiate the investment process as follows. It will:

  1. Conduct a pre-due diligence (checking integrity and reputation, early risk / warning detection) and coordinate with the EC. First discussions with founders may take place at this stage.
  2. Invite the founder to a due diligence (in-depth check of the team, company ownership structure, the IPR, legal terms and financials will take place).
  3. The EIC Fund will conduct a market test actively seeking for co-investors.
  4. The EIC Fund will issue a proposal addressed to the EIC Fund Investment Committee with a recommendation to invest (or not).
  5. Upon positive outcome of the EIC Fund Investment Committee, the founder and the investment adviser of the EIC Fund will enter into legal negotiations to structure a contractual agreement.
  6. The final agreement will be presented as a recommendation to the Board of Directors of the EIC Fund that will make a decision on the investment and sign the agreement.

Are you interested in applying to the EIC Accelerator Program and its blended finance option? Get in touch with us and we will provide you with a no-cost, no-obligation assessment of your project to determine if you would be a good fit for the program.