Eventually most founders will face that one question at one point in their endeavour: How am I actually going to finance my dream of building my own company? This has been an important topic in numerous discussions with founders and I realised that there are some funding sources not known to everyone. I therefore sat down to summarise the 7 European funding options I believe to be most suitable for founders of innovative and high-risk tech companies.
In principle, these opportunities can be classified into two clusters — one being non-dilutive methods of funding and the other being dilutive. Dilution is the decrease in ownership for existing shareholders (e. g. founders) in case a company issues new shares to new shareholders. An example of funding that leads to dilution is an equity round bringing in new external capital with the existing shareholders not participating or participating to a lesser degree than their current shares. Non-dilutive, on the other hand, is a funding opportunity that doesn’t have any impact on the cap table as is the case with public grants or money generated through awards and prizes. While I will cover non-dilutive opportunities in this post, I will publish one covering dilutive ways of funding your startup with EU money in a couple of days.
The European Commission (EC) launched Horizon 2020 in 2014 — a financial instrument to ensure Europe’s global competitiveness and foster innovation across the EU. In addition to EU countries there are a number of non-EU countries, or so called associated countries, meaning that legal entities in these countries are eligible for funding within the Horizon 2020 scheme. A complete list of these countries can be found here.
There are a number of programs within this framework that from my point of view offer an interesting funding opportunity for startups, especially those within the “enhanced European Innovation Council” (EIC):
- Fast Track to Innovation (FTI)
- European Innovation Council Horizon Prizes
- Programs within the EIC Accelerator
FTI is a program that supports consortia of three to five partners from industry and not-for-profit institutions who are developing a close-to-market innovation. Partners have to come from three different EU or associated countries* and, depending on the size of the consortium, at least 50% of the partners must be industry partners.
At least 60% of the overall budget needs to be allocated to the industry partner(s) and the budget for the whole consortium can be up to EUR 3m. Funding rates are 70% for for-profit entities and 100% for not-for-profit entities. The total budget allocated to FIT for 2019 and 2020 is EUR 100m annually. As with most programs there are regular calls for applications. In the case of FTI there are three deadlines p. a. for this program which is running until October 2020.
An analysis of past FTI calls shows the distribution of funding across individual EU countries with the UK (EUR 60m), Germany (EUR 48m) and Spain (EUR 41m) being the top 3 countries in terms of total budget allocated:
In terms of total number of projects, Spain, the UK and the Netherlands rank the highest with 28, 19 and 12 projects in the respective country:
To summarise: I believe this program to be a great source of funding for innovative companies with a close-to-market product that needs some further investment in R&D. Two things to bear in mind:
- FTI is a very competitive project. Less than 10% of the submitted proposals get funded. so take some time to investigate which projects have been funded in the past and carefully evaluate if you fulfil or even better go beyond the required criteria.
- Putting together a consortium, managing the application and then hopefully a funded project is complex — you need to ensure enough resources to manage this rather administrative process adequately.
If you need more info I recommend you visit the specific European Commission’s page.
Modelled after the American X-Prize the EC has developed the Horizon Prizes that award those who can most effectively meet a defined challenge with up to EUR 10m . The overall objective is to stimulate ideas and solutions in areas most relevant to the well-being of European society. Some examples include:
- ‘Innovative Batteries for eVehicles’
- ‘Fuel from the Sun: Artificial Photosynthesis’
- ‘Early Warning for Epidemics’
- ‘Blockchain for Social Good’
- ‘Low-Cost Space Launch’
- ‘Affordable High-Tech for Humanitarian Aid’
Any legal entity (individuals, NGOs but also for-profit organisations) can apply to one of the open calls which are listed on the Commission’s website. To give you an example: there is currently a call open to develop cost-effective and scalable solutions for “Early Warning for Epidemics” with a prize of EUR 5m.
The third funding option I believe you should be aware of is the EIC Accelerator and its programs. Most of you may already be familiar with the Phase I and Phase II tools. These have been recently complemented by the EIC fund (also called the SME Phase 2b tool) which is able to support companies with up to EUR 17.5m (!!).
The Phase I Tool rewards companies with up to EUR 50k to develop their business plan. The application process is fairly easy — for most, it is a 10 page summary of the business plan you may already have.
My evaluation: You have to be aware of the following:
- The program is being terminated, but you can apply one last time this summer with the deadline quickly approaching(05.09.2019). If you want to apply, make sure to be quick!
- his is a highly competitive program with a roughly 10% success rate.
My recommendation: I still believe it’s worth the effort, especially if you already have a business plan in place.
The Phase II Tool offers the opportunity to apply for a much higher sum: companies with a product or service in Technology Readiness Level 6–8 (TRL) can apply for EUR 0.5m to EUR 2.5m. For those who are new to the space: TRL is a scale that was originally developed by NASA to assess the maturity of technologies. TRL 6 e. g. means that “technology has demonstrated in relevant environment (industrially relevant environment in the case of key enabling technologies)” as stated by the Commission here. The objective of Phase II is to help companies to finalise the development of their products, services or processes. The money can, for example, be spent on (clinical) trials, validations or approval processes.
- Phase II is the superlative of competitiveness. The last call saw 1.765 applications with merely 78 being successful (4%).
- Putting the proposal together of up to 30 pages plus several pages of annexes is much more complex and intense than for a Phase I proposal — mainly because in addition to describing your project you have to submit a very detailed cost calculation for so called work packages.
My recommendation here is similar to what I said about FTI:
- Carefully evaluate if you meet the criteria and compare yourself with those applicants who have successfully received funding.
- An initial self-assessment can also help in understanding what your chances of success are.
If interested in applying, you can find all relevant information on the Commission’s portal here.
The EIC fund launched on the 5th of June, 2019. It’s a tool that combines both a non-dilutive (grant) and dilutive (equity) component and is therefore a hybrid financing option and the last one I’m presenting today. The grant component is being managed by the European Commission, as are the Phase I and Phase II tools; however, the equity-component is managed by the European Investment Bank (EIB). This tool gives companies the opportunity to receive a combined EUR 17.5m of which EUR 0.5m — 15m are an equity investment and EUR 2.5m (EUR 3.5m for health-care and life science projects) are non-dilutive. Big difference when compared to VC money: The EIC fund offers patient capital meaning that the holding period of 7–10 years is longer compared to traditional VC funds. Also, the objective of the fund is to make “impact investments” and not to primarily generate a return on investment.
My evaluation: As the program has only been recently launched there’s little practical experience and evidence out there. But it sounds very promising and I expect it to make a big difference for those companies who’ll be successful in receiving capital from this program.
Therefore, my recommendation is: Be quick. The first call ends of the 09th of October, 2019. Further information on the fund and the # guidelines can be found online.
And now: Please use the comment section to share your experiences and insights on non-dilutive EU startup funding!