An Inside Look into the EIC Accelerator Fund and its Equity Financing (SME Instrument)

The EIC Accelerator blended financing (formerly SME Instrument Phase 2, grant and equity financing) is a highly competitive program that is slowly evolving into a fully fletched startup financing initiative (read: EIC Accelerator Introduction). Unfortunately, the latest developments regarding its equity financing have led to confusion and criticism as it was expressed in a recent Politico article.

The first startups and Small- and Medium-Sized Enterprises (SME) who have successfully obtained EIC Accelerator financing under the blended funding program in 2019 had to wait for over a year to receive their first equity payment which means that the funding was promised but only provided with a significant delay while some companies are still waiting for their first payment.

This, of course, can be detrimental to many businesses that have passed the exceedingly difficult evaluation process and managed to win the EIC Accelerator grant against odds of 1-5%. With the 2021 template seeing the introduction of even more steps to the process (i.e. a small application and a video pitch) and more restrictions (i.e. freezing periods upon rejection), many applicants are requesting additional clarifications before even considering to apply for the blended financing program (read: Proposed 2021 Process)

To inform applicants as well as professional grant writers and consultancies, Stéphane Ouaki, the chair of the investment committee of the EIC Fund, has been answering the most critical questions on the TechEU Podcast regarding the internal process of equity financing under the European Innovation Council (EIC) Fund as well as the remote evaluation performed by the European Agency for SME's (EASME). This article presents a short summary of the key takeaways of the conversation.

Grant vs. Equity

> While the grant funding process is fast and has been perfected over the past decade, the equity financing is still very new for the European Commission (EC) since it is a government body and not a private investor (read: Grant vs. Equity).

> The grant financing is usually provided within one or two months through an initial upfront payment but the equity financing must undergo additional due diligence which should last 6 months on average but can also last 9-12 month in some cases. Comment: This could likely be accelerated significantly if the EIC presents a list of required materials ahead of time so that 80% of files can be uploaded as soon as the equity financing is awarded.

Due Diligence and Timing

> The equity payment is not provided in a stand-alone fashion like the grant payment but is envisioned to be supplementary to a financing round with other investors which has to be planned by the company itself. Comment: This means that, if there are no financing rounds with other investors planned, the EIC Fund will likely not invest. It also means that the financing is delayed depending on the timing of the next financing round.

> If the applicant has been successfully awarded the EIC Accelerator blended financing and coincidentally also performs a financing round at that time, the EIC Fund can directly invest in the startup, provided the due diligence has been completed.

> The full equity financing will be paid in 2-3 separate trenches in most cases.

> If the due diligence for the equity financing has a positive result but no financing round is in progress, the EIC Fund can immediately invest through a convertible note which averages 50% of the agreed-upon equity financing. Less is given through the convertible note if the due diligence deems the company to be sufficiently financed.

> Since blended financing always includes a grant component that is paid in a much faster manner, no company should be in financial difficulties once the EIC Accelerator has been granted.

Behind the Scenes

> The advisory board of the EIC Fund is having weekly meetings and is working hard on making the equity process as smooth as possible but mistakes will be made throughout this pilot phase.

> If the company performs a financing round with non-EU investors then this will not negatively impact the EIC's equity investment.

> The due diligence can directly impact the granted equity financing whereas the amounts could be reduced or entirely cancelled if the EIC deems the beneficiary to not fit their criteria any longer.

> The EIC can place a private industry representative in the company board if it deems this to be necessary but there is currently no infrastructure available to facilitate this process at scale.

> Equity applications have not been prioritized over grants even though many rumours and experiences might suggest otherwise. If equity financing was used to fund grant-applicants then this was directly related to the Technology Readiness Levels (TRL) of the funded activities (read: TRL and TRL Funding). Comment: The TRL designations are often up for interpretation and it is possible that TRL's were effectively used to funnel more applicants towards equity financing due to limited grant budgets.

Comments on the Politico Article

> The complaints expressed in the Politico article have not reached the EIC Fund representatives. Comment: This is understandable since business-making or -breaking money is involved and complaints will only make things worse - not better.

> Complaints regarding the due diligence and long delays are likely stemming from a comparison to the EU's smooth grant approval process which is much simpler and faster. Comment: Saying that startups are „used to the smooth grant process“ and that this is the reason for complaints is unlikely since many funded companies are first-time EU-applicants. Even though they can directly compare grant and equity proceedings through the blended financing program, they are more likely to be used to a private due diligence process and compare the EU's performance to that.

> Companies who were awarded the equity financing in the highly competitive process expected to receive the promised awards from the EIC Fund but were told to find other investors first. The EIC Fund's position is that companies have to be proactive in raising investments while the EIC Accelerator beneficiaries were shocked that they did not receive the funding after having been promised a specific amount. Comment: Both are correct but the EIC should have been transparent about this from the very beginning since the way it described equity investments in its guidelines, in hindsight, was deceptive.

Vague Answers

> The question regarding the discrepancy between the grant and the equity due diligence did not receive a direct answer but it is an excellent question since both are government funds and should face similar scrutiny. The answer detailed how the due diligence for equity financing is more in-depth but it does not clarify why the grant payout is possible without it. Comment: Since equity stakes, long term associations with the EU and the potential placements of board members are involved, it is evident why a due diligence process would be necessary. In addition, the mentioned ranking system for grant evaluations performed by EASME will likely disappear in 2021 due to the absence of a scoring system. This can make the grant evaluation process less transparent and likely more 'bumpy' as well.

> As the last interview question, the criteria of non-bankability was further investigated. The interviewer simply asked if the EIC is looking for success cases or for non-bankability cases as their first priority (read: EU Buzzwords). The answer is: Success cases. Comment: This answer was given in a very vague manner and evaluators, either remote or in the pitch jury, might not share this priority.

Conclusion

In summary, the negative experiences of the companies that have applied for equity financing under the EIC Accelerator all stem from a lack of communication from the side of the EIC but this is understandable since the funding is called the 'EIC Accelerator Pilot' for a reason. The governing bodies are still in the learning process and the 2021 version of the EIC Accelerator under Horizon Europe (2021-2027) will likely remedy most of the reported issues.

Still, the EC and EIC clearly neglected their responsibility to explain the nature of the funding ahead of time. Even though equity guidelines were available specifically for this purpose, they did not include any of the critical information provided above.

Moving forward, companies have to be aware of the timing of payments, the ongoing scrutiny (i.e. pulling of funds can potentially happen at any time), the delays caused by a slow due diligence process and of the EIC's preference to only invest in existing or planned financing rounds. The advisory board and decision-makers of the EIC Fund have learned valuable lessons in this initial pilot phase of the EIC Accelerator and are expecting to launch a more transparent and smooth version of the program soon.

These tips are not only useful for European startups, professional writers, consultants and Small and Medium-Sized Enterprises (SME) but are generally recommended when writing a business plan or investor documents.

Deadlines: Post-Horizon 2020, the EIC Accelerator accepts Step 1 submissions now while the deadlines for the full applications (Step 2) under Horizon Europe are listed below. The Step 1 applications must be submitted weeks in advance of Step 2. The next EIC Accelerator cut-off for Step 2 (full proposal) can be found here. After Brexit, UK companies can still apply to the EIC Accelerator under Horizon Europe albeit with non-dilutive grant applications only - thereby excluding equity-financing. Switzerland has resumed its participation in Horizon Europe and is now eligible for the EIC Accelerator.

Contact: You can reach out to us via this contact form to work with a professional consultant.

AI Grant Writer: ChatEIC is a fully automated EIC Accelerator grant proposal writer: Get it here.

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