Strategic Capital: An In-Depth Analysis of the EIC STEP Scale-Up Instrument and the Future of European Deep-Tech Competitiveness

Section 1: Executive Summary

The European Union stands at a critical juncture, confronting a persistent and strategically perilous "scale-up gap" that threatens its long-term economic competitiveness and technological sovereignty. While Europe excels at generating world-class research and early-stage startups, it systematically fails to provide the growth capital necessary to scale these ventures into global industrial leaders. This report provides an exhaustive analysis of the European Innovation Council's (EIC) most ambitious and targeted response to this challenge: the Strategic Technologies for Europe Platform (STEP) Scale-Up instrument.

Tracing the evolutionary trajectory of EU innovation funding, this analysis documents a deliberate and consequential shift from grant-based R&D support under the Horizon 2020 SME Instrument to the blended finance model of the EIC Accelerator, and culminating in the large-ticket, equity-only approach of the STEP Scale-Up. This evolution reflects the EU's reframing of a market failure into a matter of geopolitical urgency, where the absence of homegrown champions in sectors like semiconductors, quantum computing, and biotechnology is viewed as a strategic dependency. The STEP Scale-Up instrument is the sharpest tool of this new industrial policy, designed to inject €10 million to €30 million of equity into Europe's most promising deep-tech companies, catalyzing funding rounds of €50 million to €150 million and anchoring their growth and intellectual property within the Union.

However, the implementation of this strategic vision is fraught with challenges. An examination of the EIC's portfolio reveals significant systemic biases. Funding is heavily concentrated in a few Western European innovation hubs, particularly France, Germany, and the Netherlands, while "widening" countries in Central and Eastern Europe are largely left behind. Sectorally, MedTech and Health have received a disproportionate share of funding. Furthermore, the EIC's operational capacity has struggled to keep pace with its financial ambition, leading to severe delays in investment disbursement that have jeopardized the very companies it aims to support. A fundamental paradox also emerges: while mandated to fund "non-bankable" ventures, the EIC frequently supports companies already validated and de-risked by private venture capital, raising questions about its additionality and role in the ecosystem.

Looking forward, the STEP Scale-Up instrument is not an endpoint but a blueprint for the future of EU innovation policy. The principles underpinning it—strategic targeting, large-scale equity investment, and public-private co-investment—are set to be mainstreamed under the forthcoming "European Competitiveness Fund" in the next EU budget cycle (FP10). This presents both a monumental opportunity and a profound risk. If the EU can resolve the EIC's operational frictions and wield its capital with the agility of a strategic investor, it could make significant strides in closing the scale-up gap. Conversely, if it remains encumbered by bureaucracy and political pressures for "safe" wins, it risks stifling the bottom-up innovation pipeline and failing to build the resilient, sovereign industrial base it seeks. This report concludes with targeted strategic recommendations for policymakers, founders, and investors on how to navigate this complex and evolving landscape to maximize the potential of Europe's deep-tech future.

Section 2: Introduction: The Strategic Imperative for European Scale-Up Capital

The 21st-century global economy is defined by a fierce competition for technological leadership. In this arena, the European Union finds itself in a precarious position. Despite a world-class research base and a vibrant startup culture, the EU has a structural deficiency in its ability to transform promising innovations into dominant, market-leading enterprises. This challenge, long identified as the "scale-up gap," has evolved from an economic concern into a pressing issue of strategic autonomy, prompting a fundamental rethink of the EU's role as a market actor and leading directly to the creation of its most potent financial intervention to date: the EIC STEP Scale-Up instrument.

The European "Scale-Up Gap": A Multi-Trillion Euro Problem

The disparity in growth capital between Europe and its global competitors is not a matter of small margins; it is a chasm measured in orders of magnitude. For over a decade, data has consistently shown that European startups and scale-ups are starved of the late-stage funding required for global expansion. Venture capital (VC) investment in the United States is six to eight times higher than in the European Union on an annual basis. Globally, the EU's share of total venture capital raised is a mere 5%, dwarfed by the 52% captured by the United States and 40% by China.

This aggregate gap masks an even more acute problem at the company level. The average VC-backed company in the US receives five times more financial support than its European counterpart. The deficit is most pronounced in the crucial scale-up phase, where companies transition from product development to aggressive market growth. In the US, approximately two-thirds of all VC funding is directed towards scale-ups, whereas in Europe, this figure is less than half. European companies that reach ten years of operation have, on average, raised 50% less capital than their peers in San Francisco. This is not due to a lack of quality ideas; it is a systemic market failure. The European VC market is fragmented and underdeveloped, particularly at the top end. The number of large VC funds—those with over €500 million in assets capable of writing the large checks needed for scaling—is 12 to 14 times greater in the US than in Europe.

The consequences of this capital deficit are severe and tangible. When European companies with global potential seek substantial growth funding, they often find it not in Paris, Berlin, or Stockholm, but in New York, Silicon Valley, or Asia. This leads to a consistent and damaging exodus of value. A staggering 44% of companies supported by EIF-backed VC funds that were sold between 2003 and 2015 were acquired by non-European buyers. More recently, analysis has shown that nearly 30% of European "unicorns" (companies valued over $1 billion) have relocated their headquarters outside the European Union, driven by the search for deeper capital markets and a more unified regulatory environment. This represents a direct loss of future jobs, tax revenue, and, most critically, control over key technologies.

From Innovation Support to Technological Sovereignty

For years, the scale-up gap was framed primarily as an economic problem—a market failure that constrained growth and job creation. However, against the backdrop of escalating global technology rivalry, supply chain disruptions, and the weaponization of economic interdependencies, the European Commission has fundamentally reframed the issue. The lack of homegrown European giants in critical technology sectors is no longer seen as just a missed economic opportunity; it is a strategic vulnerability that undermines the EU's "technological sovereignty".

This shift in perspective is central to understanding the genesis of the EIC and its instruments. The EU recognized it has a "conversion problem": it is exceptionally strong in foundational research but demonstrably weak in converting that research into commercial products and scaling those products into global market leaders. The reliance on non-EU providers for essential technologies—from semiconductors and cloud computing to AI platforms and clean energy components—is now viewed as an unacceptable strategic risk.

This geopolitical reframing has justified a far more interventionist and state-led investment approach. The objective is no longer simply to correct a market failure by providing grants for R&D. The new imperative is to actively shape the market by building and anchoring strategic industrial capacity within the EU. This involves not just funding innovation but directing that funding towards specific, politically defined strategic sectors and ensuring that the resulting companies and their intellectual property remain in Europe. The EIC STEP Scale-Up instrument is therefore not merely a funding program; it is a tool of 21st-century industrial policy. Its success will not be measured solely by traditional financial metrics like return on investment, but by its contribution to a broader geopolitical goal: a more resilient, competitive, and autonomous European Union. This dual mandate—simultaneously financial and geopolitical—creates a set of inherent tensions that define the instrument's operation and will ultimately determine its success.

Introducing the EIC STEP Scale-Up

The EIC STEP Scale-Up is the EU's most direct and ambitious intervention to address the deep-tech scale-up deficit. Launched as part of the 2025 EIC Work Programme, it represents the culmination of a decade-long policy evolution away from grants and towards strategic equity. Its design is a direct response to the specific challenges identified in the European innovation ecosystem.

The instrument is built to provide large-ticket, equity-only investments, typically ranging from €10 million to €30 million per company. This is not early-stage or seed funding; it is substantial growth capital. Critically, this public investment is designed to be catalytic, aiming to unlock much larger private funding rounds in the range of €50 million to €150 million or more. By acting as a strategic co-investor, the EIC aims to de-risk these large rounds for private VCs and institutional investors, thereby bridging the exact funding gap where European companies most often falter. It is a targeted surgical strike on the "second valley of death"—the perilous journey from a validated product to a scaled, global enterprise. As the pinnacle of the EU's strategic capital strategy, its performance will serve as a crucial test of whether public-sector ambition can effectively translate into private-market dynamism.

Section 3: The Evolutionary Path to Strategic Equity: From SME Instrument to STEP Scale-Up

The EIC STEP Scale-Up instrument did not emerge in a vacuum. It is the product of a decade-long, deliberate, and often challenging policy evolution within the European Union. This journey reflects a progressive realization that traditional grant-based support, while valuable for research and development, is insufficient to create globally competitive technology companies. The path from the SME Instrument under Horizon 2020 to the strategic equity model of STEP Scale-Up reveals a clear and determined progression by the EU to move from being a passive funder of innovation to an active, risk-bearing investor in its own industrial future.

3.1. The Horizon 2020 SME Instrument: A Grant-Centric Beginning (2014-2020)

Launched in 2014 as part of the Horizon 2020 framework programme, the SME Instrument was a landmark initiative. For the first time, the EU had a funding tool dedicated exclusively to Small and Medium-sized Enterprises (SMEs), a significant departure from previous framework programmes that primarily funded large, multi-partner research consortia. Its core objective was to fill the funding gap for early-stage, high-risk R&D and to stimulate the private-sector commercialization of research results.

The instrument was structured in distinct phases. Phase 1 offered small grants of up to €50,000 for companies to conduct feasibility studies, market analysis, and develop a business plan. Phase 2 was the core of the program, providing substantial grants ranging from €500,000 to €2.5 million to support innovation activities like prototyping, testing, and demonstration—effectively helping companies move their innovations from a proof-of-concept to a market-ready prototype (typically Technology Readiness Levels, or TRL, 6 to 8). A third phase offered business acceleration services like coaching and mentoring but no direct funding.

Initially, the SME Instrument was organized around thematic topics such as Health, ICT, and Energy, requiring applicants to fit their projects into predefined categories. This was later replaced by a fully "bottom-up" open call, allowing any high-potential innovation to apply. The instrument proved immensely popular, attracting tens of thousands of applications and becoming a recognized quality label for innovative SMEs across Europe.

However, its limitations became increasingly apparent. As a primarily grant-based instrument, it was highly effective at supporting R&D but stopped short of providing the large-scale growth capital needed for market deployment, manufacturing scale-up, and international expansion. It helped companies build a better prototype but could not help them build a global business. This exposed the "second valley of death," where companies with market-ready products still struggled to find the multi-million-euro investments needed to scale. Recognizing this, the EU began to shift its strategy. The discontinuation of the grant-heavy Phase 1 in 2019 was a clear signal of this change, moving the focus away from funding early-stage ideas and towards supporting more mature companies with proven potential.

3.2. The EIC Pilot and the Shift to Blended Finance (2018-2021)

The conceptual groundwork for the European Innovation Council (EIC) was laid in 2015, with a pilot phase launched in 2018. This pilot began to integrate previously separate instruments, including the SME Instrument and the Future & Emerging Technology (FET) programme, into a more coherent pipeline designed to support innovation from early-stage research to market deployment, structured around the "Pathfinder," "Transition," and "Accelerator" pillars.

The most radical and disruptive change introduced during this pilot phase was the creation of the EIC Fund and the concept of "blended finance". The new EIC Accelerator, which replaced the SME Instrument Phase 2, no longer offered only grants. Instead, it provided a unique combination of funding: up to €2.5 million in non-dilutive grants for innovation activities, coupled with an optional equity investment of up to €15 million managed by the EIC Fund.

This represented a profound philosophical shift in EU policy. The Union was no longer just a passive grant provider; it was becoming a direct, co-investing shareholder in private companies. This move was designed to address the scale-up gap head-on. By taking an equity stake, the EIC could provide the patient capital needed to help companies cross the TRL 9 barrier into full commercialization. The intention was to act as a catalyst, using public equity to "crowd in" private investment from venture capitalists and other market actors who might otherwise be hesitant to back high-risk, deep-tech ventures. The EU was signaling its willingness to share market risk in a way it never had before.

3.3. The EIC Accelerator: Solidifying the Model and Facing Systemic Challenges

With the launch of the Horizon Europe framework programme in 2021, the EIC Accelerator was established as the EU's fully-fledged flagship program for supporting innovative SMEs and startups. Operating with a substantial annual budget (e.g., €675 million in 2024 and €634 million in 2025) and a notoriously competitive application process, it became the most sought-after source of public funding for deep-tech companies in Europe.

However, the ambitious shift to an equity investment model created immense institutional friction. The European Commission, an organization designed and optimized for grant administration, found itself ill-equipped to handle the complex, fast-paced world of venture capital. The processes of conducting due diligence, negotiating term sheets, and managing a portfolio of equity stakes proved to be a significant challenge. This mismatch between policy ambition and administrative capacity led to severe operational headwinds, including damaging delays in investment disbursement and a "clear backlog of deals," with some companies waiting over a year to receive the equity they had been awarded.

As the Accelerator matured, analysis of its beneficiary portfolio revealed persistent systemic biases. Funding was not distributed evenly across the Union. A stark geographical concentration emerged, with a handful of Western European countries—notably France, Germany, and the Netherlands—securing a disproportionate share of the awards, while countries in Central and Eastern Europe were consistently underrepresented. Sectorally, a clear preference for MedTech and Healthcare became evident, which together accounted for over 40% of all funded companies. These patterns indicated that, rather than bridging the continent's innovation divide, the instrument was inadvertently reinforcing the strength of existing, mature innovation hubs.

3.4. The Genesis of STEP: A Targeted Response to the Deep-Tech Scale-Up Deficit

The creation of the EIC STEP Scale-Up instrument, introduced in the 2025 work programme, is the logical conclusion of this evolutionary journey. It represents a direct response to both the strategic need for more scale-up capital and the operational lessons learned from the EIC Accelerator.

First, it marks the final step in the evolution from grants to equity. The STEP Scale-Up instrument dispenses with the grant component entirely, offering large, equity-only investments of €10 million to €30 million. This separates the function of large-scale growth investment from the grant-hybrid model of the Accelerator, creating a more focused and specialized tool.

Second, it is explicitly top-down and strategic. Unlike the largely bottom-up "Open" calls of the Accelerator, STEP Scale-Up is designed to implement the Strategic Technologies for Europe Platform (STEP) regulation. Its scope is narrowly focused on companies in critical technology areas deemed essential for the EU's future sovereignty, such as digital technologies, deep tech, clean tech, and biotech.

Finally, it targets a very specific market failure. It is not designed for early-stage companies but for established SMEs and small mid-caps that are ready for hyper-growth and are seeking to raise major funding rounds in the €50 million to €150 million range—the precise stage where the European capital market is weakest compared to the US. The evolution of EU funding instruments reveals a core tension: the desire to foster a dynamic, risk-taking innovation culture akin to that of the US clashes with the institutional realities of a large public administration. The operational difficulties of the EIC Fund are not merely administrative hiccups; they are symptoms of a fundamental clash between the culture of public bureaucracy and the culture of venture capital. The STEP Scale-Up instrument, by doubling down on large, direct equity stakes, represents the ultimate test of whether the EU can successfully adapt and adopt the mindset, agility, and processes of a strategic investor, or whether its ambitions will remain constrained by its bureaucratic DNA.

Table 1: Evolution of EIC SME/Scale-Up Funding Instruments

Instrument Name	Programme	Period	Funding Type	Max EU Funding	TRL Focus	Primary Objective
SME Instrument Phase 2	Horizon 2020	2014-2020	Grant-Only	€2.5 million	6-8	Support R&D and demonstration to bring innovations to market readiness.
EIC Accelerator	Horizon Europe	2021-Present	Blended Finance (Grant + Equity)	€2.5M Grant + €15M Equity	5-9	Develop and scale up high-risk innovations; bridge the gap to market.
EIC STEP Scale-Up	Horizon Europe	2025-Present	Equity-Only	€30 million	9+	Catalyze large funding rounds to create global leaders in strategic technologies.

Section 4: Anatomy of the EIC STEP Scale-Up Instrument

The EIC STEP Scale-Up instrument is a highly specialized and powerful tool, meticulously designed to intervene at a critical point in the lifecycle of Europe's most promising deep-tech companies. Its mechanics reflect a sophisticated understanding of the specific market failure it aims to correct and the strategic objectives it is mandated to achieve. A granular analysis of its core components—from its mandate and funding mechanism to its rigorous evaluation process—reveals a clear blueprint for how the EU intends to build its future industrial champions.

4.1. Core Mandate: Fostering European Champions in Strategic Technologies

The explicit mission of the EIC STEP Scale-Up goes far beyond simple financial support. Its stated goal is to transform companies with breakthrough prototypes into globally competitive industrial leaders, thereby enhancing Europe's technological sovereignty and securing its strategic value chains. A key condition of the investment, managed by the EIC Fund, is to ensure that the supported companies anchor their value, including their intellectual property (IP) and scale-up activities, within the EU or its Associated Countries, contributing directly to economic growth and job creation in the region.

This strategic mandate is reflected in the instrument's tightly defined scope. Unlike the broader EIC Accelerator, STEP Scale-Up funding is not open to all sectors. It is specifically targeted at companies operating in critical technology areas identified by the Strategic Technologies for Europe Platform (STEP) regulation. These priority sectors include:

Digital and Deep Tech: This encompasses advanced semiconductors, artificial intelligence (AI), quantum computing, advanced connectivity, robotics, and autonomous systems. The 2025 work programme explicitly notes that support for semiconductor and quantum technologies will be pursued in particular through this call.
Clean Technologies: This category covers a wide range of net-zero solutions vital for the green transition, including solar and wind technologies, battery and energy storage, hydrogen, sustainable biofuels, carbon capture and storage (CCS), and electricity grid technologies.
Biotechnologies: This includes the development and manufacturing of critical medicines, advanced therapies based on DNA/RNA and cell engineering, gene vectors, bioinformatics, and nanobiotechnology.

These technologies are deemed critical if they either introduce a cutting-edge innovation with significant economic potential or contribute to reducing the Union's strategic dependencies on foreign suppliers.

4.2. Funding Mechanism: Equity-Only, Co-Investment, and the Role of the EIC Fund

The financial architecture of the STEP Scale-Up is its most defining feature, marking a complete departure from traditional EU grant funding.

Equity, Not Grants: The support is provided exclusively in the form of equity or quasi-equity investments. There is no grant component available under this call. The EIC Fund, acting on behalf of the European Commission, negotiates the specific terms of each investment on a case-by-case basis, taking a minority ownership stake in the company.
Investment Size: The EIC Fund is empowered to make substantial investments, with applicants able to request a minimum of €10 million and a maximum of €30 million per company. This ticket size is designed to provide the significant capital injection required for late-stage growth.
Leveraging Private Capital: The EIC's investment is not intended to be a standalone source of funding. It is explicitly designed to be catalytic, acting as a cornerstone investor to attract and leverage much larger amounts of private capital. The stated goal is for the EIC's contribution to help secure a total funding round that is at least three to five times the size of the EIC's investment, targeting total financing rounds in the range of €50 million to €150 million or more.
Co-Investment Requirement: To ensure market validation and mitigate public risk, the instrument includes a crucial eligibility criterion: applicants must demonstrate pre-existing market interest. This is formalized through the requirement of a pre-commitment from a qualified lead investor (or investors) that covers at least 20% of the total target funding round. For a company aiming to raise €50 million, this means it must have secured a firm commitment of at least €10 million from a private VC or strategic investor before it can even submit its application to the EIC.

This co-investment rule is a fundamental design choice. It positions the EIC Fund as a strategic co-investor or follower, rather than a lead investor. By doing so, the EU leverages the due diligence and market assessment of experienced private sector actors, ensuring that public funds are directed towards ventures that have already passed a rigorous market test. This structure formally addresses the "non-bankable" paradox that has plagued the EIC Accelerator by creating an explicit partnership with the market instead of attempting to substitute for it.

4.3. Eligibility, Application, and Evaluation: The Gauntlet for Europe's Top Innovators

The process for securing STEP Scale-Up funding is designed to be both accessible and highly selective, filtering for only the most mature and high-potential companies.

Eligible Applicants: The call is open to single legal entities. These must be either an SME or a small mid-cap (defined as having up to 499 employees) established in an EU Member State or a country associated with the Horizon Europe programme. In a notable feature, an investor may also submit a proposal on behalf of an eligible company, streamlining the process for VC-backed firms.

Application Process: The call is continuously open, meaning companies can apply at any time via the EU's Funding & Tenders Portal. Evaluations are conducted in batches, with cut-offs taking place at least once per quarter. The application itself is demanding, requiring a comprehensive submission package that includes:

A full business plan (maximum 50 pages) detailing the company's financials, ownership structure, and STEP-related objectives.
A concise pitch deck (maximum 15 pages).
The legally binding pre-commitment letter from a qualified investor.
An ownership control declaration to verify eligibility and strategic interests.

Evaluation: The selection process is a rigorous two-stage gauntlet. First, the written proposal is assessed against criteria of excellence, impact, and implementation. If the application meets the eligibility and quality thresholds, the company is invited to the second stage: a remote interview with a jury of up to six high-level, independent experts, including experienced investors, entrepreneurs, and technology specialists. The results of the interview are communicated within approximately two weeks. The high degree of selectivity is evidenced by the results of the first evaluation batch, where out of 19 companies that submitted proposals, only five were invited to interview, and just four were ultimately put forward for investment decisions.

4.4. The STEP Sovereignty Seal: A Mark of Quality or a Consolation Prize?

A key innovation within the STEP framework is the "Sovereignty (STEP) Seal." This is awarded to all companies that pass the rigorous evaluation thresholds, irrespective of whether they are ultimately selected for funding from the EIC's budget.

The Seal serves a dual purpose. For the companies, it acts as a prestigious quality label. It certifies that their project and business plan have been vetted and validated by the EIC's expert evaluators, which can significantly increase their credibility and facilitate access to alternative funding sources. The explicit goal is to help these companies secure financing from other EU programmes (such as the Innovation Fund or Cohesion Policy Funds), national innovation agencies, and private investors who may see the Seal as a valuable de-risking signal.

From a systemic perspective, the Sovereignty Seal represents a tacit admission of two critical realities. First, the EIC's budget, while substantial (€300 million for 2025), is insufficient to fund all the high-quality scale-ups that apply. The Seal provides a valuable "consolation prize" that still offers tangible benefits. Second, it acknowledges that the EIC alone cannot solve Europe's fragmented capital markets. The Seal is an attempt to create a "common currency" of quality—a standardized assessment that can be recognized and trusted by the diverse and often disconnected array of national and regional public funding bodies across the Union. It is a top-down effort to orchestrate and harmonize a fragmented, bottom-up funding ecosystem. The ultimate success of this initiative will depend entirely on the willingness of these national agencies to trust the EIC's judgment and align their own funding decisions accordingly, an outcome that remains a significant open question. All applicants who meet the criteria, whether funded or not, also gain access to the EIC's extensive Business Acceleration Services (BAS), providing valuable coaching, mentoring, and networking support.

Table 2: EIC STEP Scale-Up Instrument - Key Features at a Glance

Feature	Details
Budget (2025-2027)	€300 million in 2025, projected to grow to €900 million over the period.
Funding Type	Equity-Only (or quasi-equity); no grant component.
EIC Investment Size	Minimum €10 million, maximum €30 million per company.
Target Round Size	€50 million to €150 million+.
Key Eligibility	Single SMEs or small mid-caps (up to 499 employees) from EU or Associated Countries.
Co-Investment Rule	Mandatory pre-commitment from a qualified investor for at least 20% of the total target round.
Target Sectors	Digital & Deep Tech (Semiconductors, AI, Quantum), Clean Tech (Net-Zero), Biotech.
Key Application Docs	50-page business plan, 15-page pitch deck, investor pre-commitment letter, ownership declaration.

Section 5: The Emerging Landscape: Winners, Losers, and Systemic Biases

While the EIC STEP Scale-Up is a new instrument, its operational philosophy and strategic priorities are deeply rooted in the broader EIC framework. By analyzing the nascent data from STEP's first beneficiaries alongside the extensive data from its direct predecessor, the EIC Accelerator, a clear picture emerges of the landscape this new instrument will shape. This landscape is characterized by a sharp focus on specific strategic sectors, a persistent geographical imbalance that favors established innovation hubs, and a complex relationship with the private market that challenges the very definition of the EIC's mission.

5.1. Inaugural Beneficiaries: A Profile of Strategic Priorities in Action

The first cohorts of companies selected for STEP Scale-Up investment provide a direct and unambiguous confirmation that the instrument's top-down strategic mandate is being executed precisely as designed. The second announced batch of four companies, selected to receive up to a combined €90 million in equity, is a textbook example of the EIC's priorities. The list includes:

Multiverse Computing (Spain): A leader in quantum and quantum-inspired AI software.
Hyimpulse Technologies (Germany): A developer of satellite launch services using innovative hybrid propulsion.
Dronamics (Bulgaria, Ireland): A cargo drone airline developing and operating same-day delivery networks.
Classiq Technologies (Israel): A provider of a platform for quantum algorithm design.

These companies fall squarely within the designated strategic sectors of Quantum/AI, Space, and advanced autonomous systems (Drones). An earlier batch of seven companies, announced in April 2025, further reinforces this trend. The selection of these firms demonstrates that the EIC is not just paying lip service to its strategic goals but is actively deploying capital to build European capacity in these high-stakes technological arenas. The inclusion of Dronamics, a company with Bulgarian origins, is a positive signal for geographic diversity, although its dual base in Ireland—a major European tech hub—highlights a common strategy for companies from smaller ecosystems to access deeper capital markets and more favorable business environments.

5.2. Sectoral Focus: The Dominance of Health, Energy, and Quantum

As the STEP Scale-Up portfolio is still in its infancy, the most robust data for understanding the EIC's inherent sectoral preferences comes from the much larger dataset of the EIC Accelerator. An analysis of the 563 companies funded under the Accelerator between 2021 and 2024 provides a powerful proxy for where the EIC's center of gravity lies.

The data reveals a heavy concentration in a few key deep-tech verticals. The MedTech/Healthcare and Biopharma sectors are the undisputed dominant forces, collectively accounting for a staggering 43.5% of all companies funded during this period. This is followed by Energy (7.3%), Agriculture (4.4%), Quantum Technologies (3.4%), and Aerospace (3.2%).

This sectoral focus is further corroborated by the EIC Impact Report 2025, which details the cumulative investment since 2021. The report highlights massive capital allocations to Quantum & Semiconductors (€850 million), Artificial Intelligence (€725 million), Clean Energy & Storage (€700 million), and Biotechnology (€625 million). While this demonstrates a clear commitment to building strength in critical deep-tech fields, it also raises questions about potential blind spots. The overwhelming focus on a handful of verticals may come at the expense of other innovative sectors that are equally important for a diversified and resilient European economy.

5.3. The Geographic Divide: Reinforcing Hubs vs. Bridging the Innovation Gap

One of the most significant and persistent criticisms of the EIC's funding distribution is its stark geographical imbalance. Rather than acting as a cohesive force to bridge the innovation gap across the Union, the data suggests the EIC Accelerator has predominantly reinforced the strength of Europe's existing, well-established innovation hubs.

The list of beneficiary countries is heavily skewed towards Western Europe. The top three countries alone—France, Germany, and the Netherlands—account for approximately 39% of all companies funded by the EIC Accelerator between 2021 and 2024. Expanding this to the top ten funded countries reveals that they have received nearly 80% of all awards. This pattern creates a clear hierarchy of "winners," with a few nations capturing the lion's share of the EU's flagship innovation funding.

The "losers" in this equation are the so-called "widening countries"—the EU member states, primarily in Central and Eastern Europe, with lower levels of research and innovation performance. In 2022, these countries collectively received a mere 7.1% of the total EIC Accelerator investment. Even more strikingly, seven of these nations—Croatia, Cyprus, Hungary, Latvia, Lithuania, Malta, and Slovakia—received no funding from the program at all that year. This disparity is not a statistical anomaly but a systemic outcome. The root causes are complex and interconnected, including varying levels of awareness and knowledge about the EIC programmes, a lack of experienced local consultants specializing in EIC applications, and the potential for unconscious bias in the evaluation process that may favor applicants from more familiar, mature ecosystems. The system, by its very design, appears to favor those who are already positioned for success.

5.4. The "Non-Bankable" Paradox: De-risking for VCs or Funding the Unfundable?

The foundational mission of the EIC is one of "additionality"—it was created to intervene where the market fails, providing capital to high-risk, high-potential, "non-bankable" innovations that struggle to attract sufficient private investment. However, the reality of its portfolio often appears to be in tension with this core principle.

A detailed analysis of EIC beneficiaries reveals that a substantial majority have a history of successful private fundraising before receiving their EIC award. One study found that 76% of all companies selected for EIC funding and an even higher 81% of those who ultimately signed investment deals with the EIC Fund had already raised private capital. This has fueled a potent critique: that the EIC is not truly funding the "unfundable" but is instead acting as a co-investor or follow-on funder for companies that have already been validated and de-risked by the private market. In this view, the EIC is not so much correcting a market failure as it is subsidizing the venture capital industry, using public money to further de-risk investments for private players.

This pattern is not necessarily a sign of failure, but rather a reflection of the deep-seated strategic tensions within the EIC. The organization is caught in a difficult position. To justify its large budget and prove its value to political stakeholders, it is under immense pressure to produce visible "winners"—companies that achieve unicorn or "centaur" status and attract significant follow-on funding. The most reliable and risk-averse path to achieving this is to back companies that are already on a strong growth trajectory with the support of established private VCs. This pragmatic pressure for demonstrable success is in direct conflict with the EIC's official, high-risk mandate to fund the truly overlooked pioneers.

The EIC STEP Scale-Up instrument, with its institutionalized co-investment requirement, brings this paradox into sharp focus. It formalizes the EIC's role as a partner to the private market. While this may be a more honest and operationally sound approach, it solidifies the EIC's position as an amplifier of market trends rather than a counter-cyclical, market-shaping force. The "winners" of this system are those companies that can successfully navigate both the public and private funding worlds, aligning themselves with the EIC's pragmatic path to achieving politically palatable success. The "losers" are the truly disruptive but riskier outliers who represent the EIC's original, more radical mission.

Table 3: Sectoral and Geographic Distribution of EIC Accelerator Beneficiaries (2021-2024)

Category	Item	Number of Companies	Percentage of Total
Top 5 Countries	France	88	15.6%
	Germany	77	13.7%
	Netherlands	61	10.8%
	Spain	42	7.5%
	Sweden	33	5.9%
Top 5 Sectors	MedTech / Healthcare	197	35.0%
	Biopharma	48	8.5%
	Energy	41	7.3%
	Agriculture	25	4.4%
	Quantumtech	19	3.4%
Data derived from analysis of 563 funded companies.

Section 6: Disruptions and Debates: Critical Perspectives on the EIC Model

The European Innovation Council's ambitious mandate to reshape the continent's deep-tech landscape has been met with both praise for its vision and significant criticism regarding its execution. The journey to becoming Europe's investor of choice has been marked by operational disruptions, strategic debates, and concerns about the very nature of the innovation it chooses to support. These challenges are not mere teething problems but reflect fundamental tensions within the EIC model—tensions that the new STEP Scale-Up instrument will both inherit and intensify.

6.1. Operational Drag: Bureaucracy, Delays, and the EIC Fund's Growing Pains

The most acute and widely publicized problem plaguing the EIC has been the severe operational drag within its investment arm, the EIC Fund. A significant "investment gap" emerged between the moment a company was officially selected for equity funding and the point at which it actually received the capital. Numerous reports highlighted waiting times that stretched beyond a year, a delay that can be fatal for a fast-growing scale-up, pushing some companies to the brink of collapse.

The root cause of this dysfunction lies in the institutional mismatch between the EIC's mission and its administrative structure. The European Commission, a body built for the methodical and rule-based administration of grants, was tasked with operating a nimble, market-facing venture capital fund. It quickly became apparent that the Commission lacked the internal expertise and processes required for the complex tasks of due diligence, term sheet negotiation, and active portfolio management. The subsequent attempt to delegate management to the European Investment Bank (EIB) was fraught with its own internal political battles and prolonged negotiations, further exacerbating the delays.

This operational inefficiency was compounded by a perceived lack of transparency. A staggering 95% of beneficiaries surveyed reported that the EIC Fund was lacking in terms of communication, support, and transparency throughout the arduous investment process. This opacity extends to the evaluation stage itself; the EIC's decision to remove the "rebuttal" function—a mechanism that allowed applicants to respond to evaluator comments—has been criticized for shielding the evaluation process from scrutiny and preventing the correction of potentially flawed assessments.

6.2. Strategic Tensions: Balancing Political Mandates, Market Realities, and True Innovation

Beyond the operational hurdles, the EIC grapples with a set of deep-seated strategic tensions stemming from its multiple, and often conflicting, objectives. The organization is pulled in several directions simultaneously: it must produce visible successes like "unicorns" and "centaurs" to maintain political support; it must focus on high-risk, capital-intensive "DeepTech"; and it must meet politically mandated targets for diversity and gender equality.

This creates a difficult balancing act. A prime example is the clash between the official emphasis on "Deep Tech" and the practical need for market validation. The EIC's mission is to fund groundbreaking technologies rooted in science and engineering. However, applicants frequently find that evaluators and jury members place a heavy emphasis on commercial traction, such as existing customer relationships or Letters of Intent (LOI). This can penalize truly novel technologies that are still in the pre-revenue stage, even if their scientific basis is strong and their potential is transformative. A project can be rejected for having a TRL that is deemed too low simply because it has not yet been used by a paying customer, conflating technological maturity with market maturity.

Another key tension exists between the EIC's bottom-up philosophy and a growing trend towards top-down, politically directed funding. While the majority of EIC funding is awarded through "Open" calls that are agnostic to the field of technology, an increasing portion of the budget is being allocated to specific "Challenges". These challenges, such as "Human Centric Generative AI" or "Food from precision fermentation and algae," direct funding towards predefined topics that align with EU policy objectives. While this ensures support for strategic priorities, it has raised concerns among some stakeholders, including former EIC programme managers, that the Commission's central bureaucracy is tightening its grip on the EIC, restricting its independence and transforming its visionary "programme managers" into mere "project managers" tasked with executing a political agenda.

6.3. Neglected Frontiers: Identifying the Sectors and Technologies Left Behind

The EIC's strategic focus, while beneficial for concentrating resources, inevitably creates blind spots, leaving certain types of innovation and entire sectors underfunded.

A primary concern revolves around the long-term innovation pipeline. The EIC's mandate is explicitly for application-driven innovation, with its Pathfinder scheme designed to bridge the gap between discovery and technology. This is distinct from the mission of the European Research Council (ERC), which is the EU's premier funder of fundamental, curiosity-driven science. However, the overarching political push for industrial competitiveness has led to fears that the strategic interests of the EIC could begin to influence the priorities of the ERC, potentially compromising its independence and starving the "blue-sky" research that generates the unexpected breakthroughs of the future.

Even within the EIC's targeted strategic areas, there are notable gaps. For example, despite a strong focus on the green transition, a detailed analysis of the EU's cleantech funding portfolio shows that crucial enabling technologies are being neglected. Areas such as long-duration energy storage (LDES), thermal energy storage, and the electrification of high-temperature industrial heat receive significantly less funding than more prominent technologies like batteries and hydrogen. Similarly, dedicated support for early-stage innovation in hard-to-abate transport sectors like clean aviation and shipping is lacking. This suggests that the top-down strategic selection process may not be comprehensive enough to cover all the technologies required for a successful transition.

Finally, the intense focus on "Deep Tech" can systematically disadvantage innovations that are less technologically complex but no less impactful. Getting funding for a pure software business, a novel digital platform, or a disruptive business model innovation is exceptionally difficult within the EIC framework, which prioritizes patentable hardware and deep scientific novelty.

Section 7: The Future Trajectory: STEP, the Competitiveness Compass, and the Next Generation of EU Innovation Policy

The EIC STEP Scale-Up instrument is more than just another funding call; it is a clear harbinger of the future direction of European innovation policy. Its design principles—large-scale strategic equity, public-private co-investment, and a focus on technological sovereignty—are not an isolated experiment but a blueprint for a more assertive and interventionist EU. As the Union prepares for its next multi-year budget framework (FP10), the logic underpinning STEP is set to be mainstreamed, fundamentally reshaping the landscape for research, innovation, and industrial competitiveness across the continent.

7.1. Scaling STEP: Budgetary Growth and Evolving Mandates to 2027

The political commitment to the STEP Scale-Up model is underscored by its ambitious budget trajectory. The instrument launched in 2025 with an initial budget of €300 million. This figure is projected to triple, reaching a cumulative total of €900 million for the 2025-2027 period. This rapid scaling signals the Commission's confidence in the instrument as a primary vehicle for addressing the deep-tech financing gap.

Furthermore, the instrument is a key pillar of the broader Strategic Technologies for Europe Platform (STEP). This platform is not a single fund but a coordinating mechanism designed to leverage and steer resources from across 11 different EU funding programmes—including the EIC, InvestEU, the Innovation Fund, and Cohesion Funds—towards the development and manufacturing of critical technologies. This indicates a significant move towards a more integrated and strategically coherent approach, breaking down the silos that have traditionally separated different EU funding streams. The goal is to create a seamless "investment journey" for strategic projects, from research to industrial deployment.

7.2. The Influence of the Competitiveness Compass: Towards a More Interventionist EU?

The strategic shift embodied by the STEP instrument has been powerfully reinforced by recent high-level policy communications from the European Commission. A landmark strategy document, the "Competitiveness Compass," unveiled in early 2025, sets out a new paradigm for the EU's economic policy, with the explicit goal to "reignite Europe's innovation engine". The document acknowledges that the EU has fallen behind the US and China in advanced technologies and calls for a more strategic, targeted, and less bureaucratic approach to funding.

Central to this new strategy is a proposal for a new European Competitiveness Fund under the EU's next long-term budget for 2028-2034. This fund would consolidate various funding streams and provide targeted support for strategic technologies like AI, space, cleantech, and biotech across their entire lifecycle. This vision directly mirrors the logic of the STEP platform, suggesting that the model of strategically directed, large-scale investment will become the central pillar of future EU innovation policy, rather than an exception.

The language surrounding the future of the EIC itself is also telling. The Competitiveness Compass states that the work of the EIC should continue with "increased risk-taking, inspired by elements of the DARPA model". This reference to the US Defense Advanced Research Projects Agency, known for its high-risk, high-reward mission-oriented research, suggests a political appetite for an even more ambitious and strategically directed EIC in the future, with some stakeholders calling for its budget to be increased four- or five-fold to match DARPA's scale.

7.3. International Benchmarking: Lessons from the US SBIR and Global VC Markets

To fully appreciate the scale of the challenge the EU faces and the significance of its policy shift, it is essential to place it in an international context.

The original SME Instrument was heavily inspired by the US Small Business Innovation Research (SBIR) program, a highly successful initiative for fostering SME innovation. However, the EIC's evolution represents a significant divergence from this model. The SBIR program is a phased grant system that provides non-dilutive funding for R&D, with a strong emphasis on commercialization in its third phase, but it does not involve the government taking direct equity stakes in companies. The IP rights are favorable to the small business, and the funding is structured as a grant, not an investment. The EIC's decisive move into direct equity investment is a uniquely European response to its specific market failures, departing from the American grant-based model.

This response must be measured against the sheer scale of the global capital markets. The EU's scale-up financing gap is immense and structural. The number of large VC funds (with over €600 million) is at least seven times higher in the US than in Europe, and the number of funds exceeding $500 million is 12 to 14 times greater. The STEP Scale-Up's budget of €900 million over three years, while a significant public commitment, is a relatively small sum when set against the hundreds of billions of dollars flowing through the US venture capital ecosystem annually. It is a necessary intervention, but it is far from sufficient to close the gap on its own. It highlights the critical importance of its catalytic mission: its success depends not on the size of its own budget, but on its ability to leverage multiples of that amount from the private sector.

7.4. Anticipating FP10: The EIC's Role in a Restructured Funding Landscape

The policy debates and strategic shifts occurring today are clear precursors to the architecture of the EU's next Framework Programme for Research and Innovation, FP10, which will run from 2028. The EIC STEP Scale-Up instrument serves as a pilot for the direction this new framework is likely to take. Its core principles are expected to be expanded and mainstreamed, making strategic equity a central, rather than a niche, component of the EU's innovation toolkit.

This trajectory is not without controversy. The proposal to fold most research and innovation funding, including the budgets for the EIC and the ERC, into a single, overarching Competitiveness Fund has sparked deep concern within the research community. In a rare joint statement, the leadership of both the EIC and the ERC called for their budgets in FP10 to be "increased" and, crucially, "ringfenced". This is a direct response to the fear that consolidating funds under a politically driven Competitiveness Fund could erode their operational independence and subject their predictable, excellence-based funding streams to the whims of shifting annual political priorities.

This sets the stage for a fundamental debate about the future of European innovation. On one hand, there is a powerful political drive towards a more integrated, strategic, and interventionist model, as exemplified by STEP Scale-Up and the proposed Competitiveness Fund. This approach offers the opportunity to finally mobilize resources at the scale needed to build European industrial champions. On the other hand, there is a significant risk that this top-down, industry-focused approach could come at the expense of the bottom-up, curiosity-driven research that has long been Europe's greatest strength and which provides the essential fuel for the long-term innovation pipeline. The future of European competitiveness may well hinge on how policymakers resolve this tension and whether a balance can be struck between strategic direction and scientific independence.

Table 4: International Comparison of Scale-Up Funding Ecosystems

Metric	European Union	United States	China
Approx. Annual VC Investment	€25 billion (2023 YTD)	€108 billion (2023 YTD)	Data varies, but peaked rivaling the US
Global Share of VC (%)	5%	52%	40% (at peak)
Number of Large VC Funds (>€500M)	Significantly lower (1/12th to 1/14th of US)	High	High, often state-influenced
Avg. Funding per Scale-Up	50% less than San Francisco peers	High	High
Key Public Instrument(s)	EIC (Equity/Grants), Innovation Fund	SBIR/STTR (Grants)	State-controlled VC funds
Figures are indicative and subject to annual fluctuations.

Section 8: Conclusion and Strategic Recommendations

The EIC STEP Scale-Up instrument represents a critical and decisive evolution in the European Union's strategy to foster innovation and secure its industrial future. It is a direct, high-stakes intervention designed to address the continent's most persistent economic vulnerability: the deep-tech scale-up gap. By moving beyond grants to deploy large-scale, strategic equity, the EU has signaled its intent to act not just as a funder, but as a market-shaping force. However, the success of this ambitious policy is contingent on overcoming significant operational hurdles, mitigating systemic biases, and navigating complex strategic tensions. The following recommendations are offered to key stakeholders—policymakers, innovators, and investors—to help maximize the instrument's potential and contribute to a more competitive and sovereign European technology landscape.

8.1. For Policymakers: Enhancing Efficiency, Mitigating Bias, and Sharpening Strategic Focus

Recommendation 1: Solve the Operational Bottleneck. The chronic delays in the EIC Fund's investment process are untenable and undermine the very purpose of the instrument. The European Commission must urgently reform the fund's governance to grant it greater operational autonomy from standard administrative procedures. This includes empowering it with the necessary resources and, critically, staffing it with experienced venture capital professionals who can execute due diligence and close investment rounds at market speed. The fund's performance should be measured against clear KPIs for investment velocity, and it must be given the flexibility to achieve them.
Recommendation 2: Actively Counteract Geographic Bias. The concentration of EIC funding in a few member states is a systemic failure that perpetuates the innovation divide. To counter this, a portion of the STEP Scale-Up budget should be explicitly earmarked for high-potential companies from "widening countries." Furthermore, the EU should create dedicated support mechanisms—beyond the passive award of a Seal—to help these companies build the necessary networks and secure the required private co-investment, for instance, by facilitating introductions through the EIC's Trusted Investor Network.
Recommendation 3: Refine Strategic Focus with Evidence-Based Agility. The top-down selection of strategic sectors is a core feature of STEP, but it must not become a rigid and static list. The Commission should use portfolio data from the EIC and the Innovation Fund to continuously identify and address "neglected frontiers"—critical enabling technologies that may fall between the cracks of the current challenges. The strategic focus must be dynamic, informed by both market intelligence and a clear-eyed assessment of where critical gaps in the EU's technology portfolio exist.
Recommendation 4: Protect the Long-Term Innovation Pipeline. As policymakers design the next framework programme, FP10, and the proposed Competitiveness Fund, they must heed the warnings from the leadership of the EIC and the ERC. The pursuit of short-term industrial competitiveness must not cannibalize the funding for long-term, fundamental research. The proven success of both the EIC and the ERC relies on their distinct missions and operational independence. Therefore, it is imperative to maintain separate, ringfenced, and predictable budgets for both bottom-up, curiosity-driven science (ERC) and application-driven innovation (EIC) to ensure a healthy and balanced European innovation ecosystem.

8.2. For Founders & Innovators: Navigating the EIC Landscape and Maximizing Success

Recommendation 1: Understand the EIC's Real Priorities. Founders must recognize that despite the official rhetoric about funding "non-bankable" ideas, the practical reality of the evaluation process, especially for a high-stakes instrument like STEP Scale-Up, places immense value on market validation. A compelling business case, a clear path to commercialization, and—most importantly—a strong commitment from a lead private investor are paramount. The technology must be groundbreaking, but the business plan must be bankable.
Recommendation 2: Align with Strategic Narratives. Success in securing funding from a top-down instrument like STEP Scale-Up requires strategic positioning. Founders should explicitly frame their innovation within the EU's overarching strategic narratives, using the language found in key policy documents like the STEP regulation, the Green Deal, and the Chips Act. Demonstrating how a company's success contributes directly to the EU's goals of technological sovereignty and strategic autonomy is a powerful differentiator.
Recommendation 3: Build a Pan-European Footprint. For companies originating in smaller or "widening" countries, establishing a strategic legal or operational presence in one of Europe's major innovation hubs can be a critical success factor. As demonstrated by successful applicants like Dronamics (Bulgaria/Ireland), a dual footprint can significantly improve access to the networks, talent, and, crucially, the co-investors required to meet the EIC's eligibility criteria.
Recommendation 4: Prepare for a Marathon, Not a Sprint. The EIC application and investment process is notoriously long, complex, and demanding. Companies must approach it with realistic expectations and ensure they have sufficient financial runway to survive a process that can take many months, including potential delays even after selection. It is not a quick fix for a cash crunch but a long-term strategic financing option.

8.3. For Investors: Leveraging the EIC as a Strategic Co-investment Partner

Recommendation 1: Use the EIC as a Strategic De-Risking Partner. Private investors should view the EIC Fund not as a competitor but as a powerful co-investment partner. The EIC's participation, particularly under the STEP Scale-Up instrument, provides a significant de-risking mechanism. It acts as a patient, strategic cornerstone investor that can anchor large funding rounds, provide a strong signal of political and technical validation, and improve a company's long-term stability.
Recommendation 2: Engage with the EIC Ecosystem for a Curated Deal Flow. The EIC ecosystem offers privileged access to a pipeline of high-quality, pre-vetted deep-tech companies from across Europe. Active participation in the EIC's Trusted Investor Network and attending its Business Acceleration Services events, such as investor days and corporate matchmaking sessions, can provide a significant competitive advantage in sourcing and evaluating investment opportunities.
Recommendation 3: Treat the Sovereignty and Excellence Seals as Valuable Sourcing Tools. The various "Seals" awarded by the EIC are more than just consolation prizes; they are valuable market signals. These seals identify high-potential companies that have successfully passed the EIC's rigorous due diligence process but were not funded due to budget limitations. For investors, this represents a curated pipeline of investment opportunities that have already undergone a thorough, expert-led evaluation.
Recommendation 4: Understand the Terms of Engagement. While the EIC aims to act like a market-oriented investor, it remains a public entity with specific mandates and processes. Investors should be prepared for a negotiation process that may be more complex and potentially slower than purely private deals. However, the strategic benefits of having a patient, long-term public investor on the company's cap table—one who is focused on building European champions rather than on quick exits—can often outweigh these bureaucratic hurdles.