\Venture Capital Interview/

Launching Europe’s “unicorn factory”

Jean-Eric Paquet has a €10bn war chest to turn the European Innovation Council into "the biggest deeptech equity fund in Europe.”

By John Thornhill

Jean-Eric Paquet, the EU’s urbane director general for research and innovation, has big ambitions for European startups. More importantly, the French official has a €10bn war chest, run by the European Innovation Council (EIC), to back his plans.

“The EIC should become Europe’s unicorn factory,” he tells Sifted in an interview. “We are creating possibly the biggest deeptech equity fund in Europe.”

The veteran EU bureaucrat does not project the image of a swashbuckling, risk-taking international investor in the mould of Softbank’s Masayoshi Son or Naspers’ Koos Bekker, who both made fortunes in China’s internet boom and set up two of the world’s biggest tech investment funds. 

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But Paquet could be just as influential as these investment titans in helping some of Europe’s most promising startups achieve global scale. The EIC has already committed €1.5bn to a pilot investment programme and will soon announce the first cohort of 50 to 60 companies it is backing.

Paquet explains that the EIC fund, to be run by an executive agency separate from the commission and based in Luxembourg alongside the European Investment Bank, will focus on deeptech innovation. The intersection between digital, artificial intelligence and life sciences is its sweet spot. 

The EIC’s goal is to focus on the riskiest research and development and scaleup stages to help European startups survive the notorious “valley of death”. Most of the €10bn will be allocated as grant money, typically in bite-sized packets of €1m to €4m, but about 35% will be invested as equity finance.

“The research stage is highly risky for investors because the outcome is so uncertain. But we want to be finding the disruptive innovations of tomorrow,” he says.

By providing grants to early-stage companies, the EIC will help nurture the most interesting new technologies and investment opportunities. But it then aims to co-invest alongside established venture capital funds to maximise its financial firepower.

“The EIC is creating a deal flow in Europe. I hope funds will want to co-invest with us,” he says. “Deeptech innovation is so difficult because the funds don’t have the expertise to assess it. But we have the best experts. By funding researchers with grants we see serious stuff emerging. That is unique.”

The EIC’s mission is part of the incoming EU commission’s remit to deepen and broaden research and innovation across Europe, as it struggles to protect the region’s “digital sovereignty” in a world dominated by US and Chinese tech giants. 

In total the commission will invest up to €100bn over the next seven years as part of the Horizon Europe programme to sharpen the economy’s competitiveness.

The EIC is building on the successful model of the European Research Council (ERC), which has pumped billions of euros into pure scientific research over the past decade. “You have tonnes of amazing, amazing outcomes of that ERC programme,” Paquet says. “We are rolling it over with much increased funding.”

Paquet describes the ERC as Europe’s “Nobel prize factory” — even though he accepts that no Nobel prizes can yet be directly traced back to ERC projects because of the time lag between original research and scientific reward.

The commission’s approach has been much influenced by the work of Mariana Mazzucato, the director of UCL’s Institute for Innovation and Public Purpose, author of The Entrepreneurial State and evangelist for mission-driven, public sector innovation. Her argument is that governments should play a far more active role in helping to create and shape markets, rather than just regulating them.

To that end, the EU has identified five such missions to support that are of direct concern to citizens: clean oceans, cancer, environmentally neutral cities, climate adaptation and soil health, agriculture and food. Its main aim is to provide a positive societal impact rather than just generate a financial return.

However, not all players in Europe’s tech scene are excited by this inrush of attention and cash. Some venture capital companies argue that EU funding might muddy the market, supporting too many sub-scale startups and depressing returns.

Henry Chesbrough, an innovation expert at the Haas School of Business at Berkeley University, welcomes the EU’s innovative approach. But he questions whether the funding initiative may miss opportunities outside its core missions. 

“If you focus too soon on where the funds should be applied you can overlook more valuable gains from technology because you have foreclosed other opportunities,” he says.

For example, one of the most lucrative applications of the development of the laser industry in the 1970s was in developing the CD and DVD industries, never imagined by the original inventors of the technology. “You have to be careful not to focus too soon.”

Despite the EU’s determination to defend Europe’s digital sovereignty, it remains committed to working with outside partners. It has run research projects with non-member states, including Switzerland, Norway and Israel, and has partnered with many industrial companies.

Britain has been one of the biggest beneficiaries of the EU’s research spending given its world-class universities. But many of these institutions fear they will lose funding in a post-Brexit world and see some of their best European researchers return home.

At least Britain can retain its ties with the EU’s existing research programmes, according to Paquet. “If the withdrawal agreement is implemented then Britain remains fully part of Horizon 2020 and there is no discontinuity,” he says.

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Greg
Greg

Great. Emulate the worst abuses of Silicon Valley and slap the “Made in Europe” sticker and call that progress.