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EU’s startup accelerator fund hit by delays

The European Commission startup fund was supposed to accelerate advanced technologies and fill a funding gap — but the firms that need the cash to grow are facing delays that are starting to hurt their business.

Officials are struggling with the European Innovation Council (EIC) Accelerator’s role as a sort of venture capital fund that takes an equity stake in innovative companies, potentially conflicting with the Commission’s position as an administrative authority.

More than 30 companies due to get so-called blended financing of a grant and an equity investment are now facing a second delay in receiving payouts. Some 22 out of 30 companies that only asked for a grant — and no stake — have already gotten their cash. The fund has a budget of €1.16 billion this year.

Documents seen by POLITICO blamed a delay on April 29 on “internal discussions in the European Commission.” An earlier delay on March 22 cited IT problems.

For the companies, the long wait for promised funding is now problematic, stopping them from hiring staff or negotiating with private investors.

“Right now, the fact that we have uncertainty [as to] when we will have access to the grant puts us in a very difficult situation. It’s the total opposite of what the EIC Accelerator intends to do,” said one of two startup executives who spoke to POLITICO on condition of anonymity to avoid jeopardizing the funding.

Last year, with much fanfare, the EU last year launched a new startup fund as part of its flagship research and development program Horizon Europe. It championed a new approach to supporting European startups, allowing the EU to take equity stakes in companies that work on emerging technologies that don’t always appeal to private investors.

Interest in the EIC Accelerator was immense. More than 800 companies applied by the first deadline in June 2021, seeking €4.85 billion. “We are taking risks nobody is taking,” the EU’s chief investor Jean-David Malo said last year.

Nearly a year later, companies from the first round are still waiting for their money.

‘Internal discussions’

“While we had until recently foreseen to sign your contract at the end of April, more internal discussions in the European Commission […] are unfortunately delaying this timeline,” according to a letter the Commission sent to one of the selected companies. “We are confident nevertheless that we should be able to sign your contract by end of May/early June.”

The Commission confirmed the delay. “[An additional delay] is necessary to ensure that all legal requirements concerning granting this kind of financial support are met,” a spokesperson said, adding that blended finance is “a novelty.”

“We are confident that once the necessary steps are established, things will go much quicker in the next rounds,” the spokesperson said.

Critics say the delay is caused by unease inside the Commission on how the fund should be governed and its potential role as a business owner. The Commission’s directorate general for budget (DG BUDG) has been pressing for more indirect governance of the fund, to keep risky ownership stakes at arm’s length.

Startups will take a hit if the Commission takes too long to settle the governance issue, the European Parliament’s lead Horizon Europe lawmaker Christian Ehler said.

“DG BUDG administrators are trying to change the nature of the EIC Fund because it does not fit neatly in their existing ideas of how the Commission works,” he said in a statement to POLITICO. “Startups have spent their extremely scarce but valuable resources to apply to the EIC, and now one year later they still did not receive anything. This is hurting people, businesses and Europe’s economic growth and competitiveness.”

The fund is making changes. It will appoint an external fund manager, yielding to the demand for more indirect management. That and other changes should be concluded by June 30, the Commission said.

Consequences of delays

Startups that are waiting for their money don’t care why their money is late, as they are busy dealing with the consequences.

The companies are eager to get going on the projects that they pitched to the jury. As long as the money is delayed — even if it is just a couple of months — they have to stall projects and the recruits that they planned to hire to deliver them or finance them by other means.

One of the companies that was selected already had some potential recruits it wanted to hire but it can’t tell them when it can offer them jobs. The uncertainty is harmful as companies are forced to burn through cash they don’t have in order to be ready to scale up rapidly when they do get the funding.

“We spent money in March, April, May on our own funding — but it can not carry on like that,” another executive said. If this continues for another two months “we will have to fire people, we will have to stop engagement, we will be in trouble”.

A way out might be to seek bridge financing from private investors, although the EU funding delay already weakens a startup’s negotiating position.

Even more damaging is that the EU’s reputation as a reliable source of funding for tech companies might be damaged before it ever gets started.

This article is part of POLITICO Pro

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