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Sifted readers respond: Should the EU put money directly into startups?

After the EU Commission invested in startups using the new EIC fund, Sifted readers share their views on what this means for the European ecosystem.

By Michael Stothard

Last week the European Commission made its first direct equity investments into startups in an attempt to plug the funding gap and boost innovation on the continent.

Conducted through a fund from the new European Innovation Council (EIC), officials said it marks a “paradigm shift” for European funding, moving away from the old model of grants and investing in VC firms.

On the face of it, this was good news for Europe.

€178m has already been invested and the fund is expected to grow to €3bn. The EIC is also going to be investing into areas that VCs typically don’t fund, such as quantum or cleantech, given they have the luxury of not really needing to make a return. This could build European deeptech expertise long term.

However, there has been significant criticism of the idea from the startup community. First came founders who had been on the EIC Accelerator, with one telling Politico: “Don’t touch this instrument because it’s going to kill your business.”

Benedict Evans, author of popular tech newsletter and a venture partner with Mosaic Ventures, warned about the dangers of accepting EU money — namely, ending up with a “f*****-up cap table”. Sifted’s Nicolas Colin argued that startups should beware.

Robert Jan van Vugt was more positive, but still warned about the increased bureaucracy.

To add to the mix, we at Sifted put out a message to our readers to get their views on the move by the EIC. Some were, to be honest, pretty critical — but there were some more positive voices as well!

The EU shouldn’t become “a VC” and startups shouldn’t take money from them.

The EIC taking a direct funding role will have a negative impact on Europe’s ecosystem in the long term. This is why:

  • The EU will not provide follow-up on funding, potentially leaving startups in a precarious situation if development goals are not met.
  • It will lead to competition between the EU and private players, potentially stunting the growth and development of the homegrown VC industry which has invested in building the expertise to nurture young companies.
  • By investing over 50% to secure ‘golden shares’ in particular ‘strategic’ industries, they are effectively being unfairly protectionist over certain sectors.
  • It could limit experimentation and spontaneity by burying startups in bureaucracy and forcing them to define themselves and the problem they are solving too early.

Instead of going directly into companies, the EU and other states should enable venture teams to continue the positive emergence of the industry in Europe, while asking what can be done by EU and individual governments to incentivise private capital LPs to allocate further to the EU venture industry.

Kjartan Rist, founding partner of early-stage European VC, Concentric.

What’s the drama? This should be positive for the ecosystem.

I am not surprised that the EU decided to start investing directly. I don’t entirely understand the drama that some people are trying to make out of it, as it seems something potentially positive for the ecosystem.

The problem I see is more in general with the application process of this program. In particular:

  • The time required to get the funding. If the aim is to finance startup innovation, 9-12 months is a very long time.
  • The unnecessary complexity of filling the application.

I evaluated several of these applications, and you can get struck off from getting funding just for not indicating that the subcontractors you use were the best value for money.

They are asking for 30+ ten-page documents, which means you make startups look for a consulting firm just to prepare the submission. Nobody working on a startup has the time to spend two months on something like that when you have limited chances to succeed and get the funding. As a result, you have to pay various thousand pounds in advance (plus a % success fee) to someone that knows very little about your business and worked more on the form than anything else.

I’d be glad to see less emphasis placed on the form of the proposals and more focus on the value of what these companies are trying to achieve.

Alessandro Ravanetti, SXSW advisory board member and European Commission expert evaluator

Will they manage it properly?

There are going to be a lot of questions for the EU regarding the set up and positioning in the market to make sure that VCs see them as a valued partner and not as competition or someone harming the market.

Normally we would see public initiatives being aimed at projects or sectors from which the private sector is (still) shying away, especially the early R&D phase of deeptech companies.

As they plan to take equity, it will be important that this initiative is managed by experienced, properly incentivised people that are aware of market standards and expectations, not to ruin the company’s future by off-market terms and valuations.

Will they make sure that the potential conflict of interest with EIF is properly managed?

Eva Arh, principal, 3VC

Nightmare

The EIC move will result in:

  • An extended bureaucratic process to obtain funds
  • An extended legal process to obtain funds
  • Rigidity of thinking in relation to criteria by which businesses are assessed as eligible for investment
  • Imposition of artificial milestones to measure achievement
  • Inflexible formalities limiting the scope of activities and controlling operational decisions of an investee business
  • Self-serving investment protection devices
  • Growth limiting drip feeding of additional capital
  • Discouraged co-investors prevented from adopting an entrepreneurial approach to pivots, growth opportunities, alternative funding, key personnel, debt and gearing, M&A and other higher risk or opportunistic activity
  • Zombies that cannot be allowed to die still being given investor cash on an intravenous drip

And so on…

It’s great news for US and UK entrepreneurs to know that they need not worry about there being a vibrant competitive ecosystem in the EU.

James Nimmo, New Hill

Can they follow on?

In Northern Ireland we have no independent VC — all of our VC firms are government-backed. Many of them use EU money to do it — though how that’s going to work post-Brexit is anyone’s guess.

It’s not all smooth sailing — even though the government agency providing the money is a limited partner — because, frankly, most government workers are incredibly risk-averse. The EU might have solved the problem, but we have lifetime civil servants making risk decisions which doesn’t sit well at all.

My questions are:

  • Can they follow on?
  • Is this a way of increasing valuations for European startups? (Note: I had a conversation with the Dutch Minister for Economic Affairs a few years ago which suggested that could be a strategy).
  • Is there a market failure in large-scale investment? Possibly.
  • What happens on exit? Where does the return go?
  • And I guess — considering my background — are they hiring?

Matt Johnston, Cimota

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