The EIC Accelerator funding (grant and equity, with blended financing option) has supported 563 innovators since 2021 and presents the flagship DeepTech funding program by the European Commission (EC) and European Innovation Council (EIC). It has grown into a popular funding option for startups and Small- and Medium-Sized Enterprises (SME) as it awards up to €2.5 million in grant and €15 million in equity financing per project (€17.5 million total).

Due to its complexity, the EIC Accelerator ecosystem is well-populated with professional writers, freelancers and consultants who support EIC Accelerator applicants through the lengthy and tedious 3-step application process. This article aims to investigate the equity investments under the EIC Accelerator which presents a novel approach for the EU government to make direct equity investments in startups as opposed to only providing non-dilutive grants.

Data Analysis

The data used in this article has been obtained from a variety of sources such as the official EIC releases (i.e. beneficiaries, budget) and directly downloadable databases from CORDIS (i.e. grant amount, Open vs. Challenge). The European Innovation Council and SMEs Executive Agency (EISMEA) has likewise created an EIC Accelerator Data Hub but it has proven to be inaccurate with much of the raw data in the downloadable spreadsheets being wrong (i.e. listing grants as €50,000 for the EIC Accelerator).

Since parts of the CORDIS data were still incomplete, certain averages were calculated to reduce the potential error and create more meaningful insights. The average EIC Accelerator grant has been determined as €2,324,262.84 based on 468 out of 563 EIC Accelerator grant recipients between 2021-2024. For the remaining 95 EIC Accelerator winners, grant data was not available or not applicable (i.e. equity-only). This average grant was used for the calculations in this article.

Why the EIC Performs Equity Investments

As has been explained in a previous article, the EIC views itself as a de-risking vehicle that is helping DeepTech companies to cross the valley of death and that has the ability to crowd in private investors (see: Digging Deep: The New DeepTech Focus of the EIC Accelerator and its Funding Bottlenecks). The mission is, therefore, to provide capital to companies and increase their runway. At the same time, they are facilitating investments from the private sector by convincing investors, who would not have invested in the company on their own (or under less favorable conditions), to invest with the EIC.

It is important to note that the core mission of the EIC is not to collect equity stakes in companies, to take control over company decisions or to become a central authority and gatekeeper in the DeepTech industry. Its mission is to help DeepTech companies bridge the valley of death and access more funding, especially from private markets.

The EIC has handed the due diligence and portfolio management of the EIC Fund over to the European Investment Bank (EIB) and Alter Domus, respectively, since it lacks the capacity or expertise to perform such services which is a clear sign that it does not see its role as a strategic investor, Venture Capitalist (VC) or private equity firm.

How the EIC Performs Equity Investments

The EIC Fund, which is the investment vehicle of the EIC Accelerator, takes direct equity stakes in companies in exchange for capital. It is therefore acting like a VC in the market including regular due diligence, term sheets, funding rounds and so on. The rules of engagement of the EIC Fund are outlined in the EIC Fund Guidelines which are regularly updated by the respective institutions and define the type of support that is available as well as the rules and conditions.

In general, the EIC Fund bases its investment decisions on the single award decision which is adopted by the European Commission (i.e. being selected for funding under the EIC Accelerator). It then starts the process of providing this investment with the help of advisors, fund managers and other potential partners such as co-investors or related networks.

The initially awarded investment (i.e. based on the EIC Accelerator proposal) can likewise be split into separate investment agreements whereas the EIC Fund decides to invest only part of it in the next funding round but reserves additional financing for a later funding round. Such decisions can be made on a case-by-case basis but the fact remains that the EIC Fund is performing venture-like investments in startups based on the EIC Accelerator single award decision.

How It Started and How It’s Going

The EIC has greatly improved its equity investment efforts and went from its own valley of death (i.e. overpromising and underdelivering) to having a well-intentioned and functioning system in place.

But is this system aligned with its core mission to bridge the funding gap and crowd in private investors?

Total EIC Accelerator Grant vs. Equity Budgets

Based on the available data, it was possible to determine the approximate budgets for grant and equity funding under the EIC Accelerator for all cut-offs between 2021 and 2024. The data shows that the equity budget was consistently larger than the grant budget even though grants were the dominant investment vehicle by the number of beneficiaries (i.e. even blended finance beneficiaries obtain a grant as well).

It is therefore evident that the EIC Accelerator has not only started to perform VC-type investments, it has become its core focus in terms of the total budget size.

The problem with this development is that grants have become the minority in terms of budget allocation while they remain the majority in terms of the number of beneficiaries. This is concerning since grants are a significantly better incentive for outside investors to invest in a company than another (much smaller) co-investor who does not bring any other benefits to the company (i.e. strategic investor, industry authority).

What is especially concerning is how the ratio of Equity to Grant budgets has been growing steadily and has started to reach and exceed a ratio of 2 in the past two EIC Accelerator cut-offs.

While this development would be acceptable if the equity demand of EIC Accelerator companies were high, it is not proportional to the number of applicants who seek EIC Fund financing in the first place.

Grant vs. Equity Per EIC Accelerator Winner

Considering the average grant provided above, it is possible to calculate the average equity investment allocated per company for each EIC Accelerator deadline. The calculation also considers the blended finance and equity-only recipients and therefore provides a good overview with reasonable accuracy.

It is evident that the size of the grant is dwarfed by the size of equity investments per company and that the size of the equity support is trending upwards. This illustrates how the EIC is gradually becoming an equity vehicle rather than a non-dilutive funding agency.

Note: As has been quantified in previous articles, the grant-first scheme is the second most popular EIC Accelerator type which still provides the opportunity for equity investments in the future. While it is a pure grant, it can effectively be converted into blended finance in the future.

The following data was used in the graphic:

Cut-Off (YY-MM-DD)	Equity Budget	Grant Budget	Equity per Company
21-6-16	€223.2M	€139.7M	€6.2M
21-10-6	€396.3M	€230.6M	€6.0M
22-3-23	€209.6M	€172.3M	€5.5M
22-6-15	€221.9M	€174.7M	€5.1M
22-1-5	€290.6M	€179.3M	€6.4M
23-1-11	€121.2M	€74.5M	€7.1M
23-3-22	€142.1M	€118.8M	€6.1M
23-6-21	€239.5M	€109.4M	€7.2M
23-11-8	€189.4M	€95.51M	€7.0M

There Should Be A Better Way

The EIC Accelerator is currently on a path of drowning out its grant incentive and replacing it with equity investments. The key mission and idea behind this strategy is to help DeepTech companies bridge the valley of death and crowd-in private investors. The EIC is likewise proud of its 3.2 investment ratio whereas, for every Euro invested by the EIC Fund, private investors such as VCs invested 3.2 Euros.

But is this the best way to measure success and the best way to incentivize investors to provide the needed DeepTech capital?

The core of what the EIC is aiming to accomplish is to bind its equity investments to the VC-type funding rounds that are planned and raised by a startup. The idea is to facilitate investor negotiations by declaring: “If you find a lead investor, we will provide you with €1 for every €3 you can raise.”

This is the current strategy of the EIC in a nutshell. It provides incentives to both the startup and the investors.

Grant+: Crowd-In With Top-Up Grants

Since the strategy of the EIC is to crowd in investors based on the funding rounds raised by startups, there is a much simpler and more straightforward way of accomplishing this goal. Blended finance, the funding option which combines grant and equity, should be converted into Grant+ which provides the normal €2.5 million maximum grant with additional top-up grants at a later stage based on future funding rounds.

Grant+ can be defined as a €2.5 million grant with an optional €1 million – €3 million grant that can be requested during the EIC Accelerator application process but will be bound to reaching certain milestones (i.e. funding round size, valuation, technology achievements, market traction). This would greatly simplify the entire process for a variety of reasons:

EIC Mission: Give Investors a Discount

Providing a grant to a startup’s next funding round is an effective discount for all outside investors (i.e. like a VC dowry). Any VC that is interested in investing will be happy to hear that the next two funding rounds of the company have a €1 million and €2 million discount associated with it.

Providing equity funding does not provide a financial benefit to outside investors since it is dilutive by nature but providing non-dilutive grants bound to funding rounds and their size is a great incentive. It will likely crowd-in far more investors than the current EIC Fund investment ever could.

‘Bureaucracy Is The Death Of All Sound Work’

The EIC does not have the expertise in providing VC-type investments which is why it used the EIB and its asset manager to execute the process. With the Grant+ approach, the EIC could take charge of the financing in full and would only require the EIB to coordinate the timing of the top-up grant at a later stage when the funding milestones are met.

In general, it would be a greatly streamlined process.

More Companies Can Get Funded

The probably greatest benefit to this approach is that the high equity budget can be used for more grant payments while equity investments of €6-7 million per company can be reduced to €1-3 million in top-up grants. A €1 million non-dilutive top-up grant will be worth more to an outside investor than a €3 million dilutive equity investment anyway since companies do not have to give up company ownership without any additional benefits.

As a result, more companies can be funded and capital is used more effectively.

A Missed Opportunity: Neglecting DeepTech

As an example, we can consider the EIC Accelerator cut-off in June 2023 which exhibited a 2.2 ratio of Equity to Grant funding budgets. The total budget was €349 million which was split into approximately €239.5M for equity and €109.4M for grants. 47 companies were funded in total with 33 receiving blended finance (grant and equity) and 14 receiving grants (grant-first and grant-only). Considering the average grant of €2.3 million, the average equity contribution was €7.2 million.

Considering that every blended finance applicant was to receive the Grant+ option with a €3 million top-up grant in their next funding round instead of an EIC Fund equity investment with an average of €7.2 million then the EIC would have an excess budget of €140.5 million. This budget could be used to provide another 60 grants considering the €2.3 million average amount.

In a call that has only funded 47 companies, it could have been possible to fund 107 companies, more than double, while still providing equity investment incentives for outside investors. In fact, a €3 million non-dilutive top-up grant would likely be a far stronger incentive than the €7 million dilutive investment by the EIC Fund. A non-dilutive grant also reduces risks and responsibilities associated with giving up a board seat or control in the future.

Note: For simplicity’s sake, the graphic considers the same amount of Grant+ applicants as there were blended finance winners. In the Grant+ example, the option would likely be very popular with most companies opting for the Grant+ funding.

Importantly, if the EIC were to target a crowd-in goal of 7.7 with pure top-up grants to match the current equity crowd-in then it could easily set this as a condition. If a company wants to receive their top-up grant, they must raise a certain amount. And, of course, this will be an incentive for outside investors to invest the full amount since the EIC grant will present a major discount for them.

Considering a €1 million top-up grant, the financing round should reach €7-8 million while a €3 million top-up grant is paid if a round reaches €21-24 million. Such numbers are very reasonable and many DeepTech companies raise significantly more during their Series A and B rounds. It is therefore a smart strategy for the EIC to create such incentives with smaller grants.

And the EIC has the opportunity to exceed the crowd-in effect of blended finance through Grant+ since the increased number of normal grant recipients (i.e. 107 instead of 47) would naturally also crowd-in more investors even with the grants that are designed to reach TRL8 and are not bound to funding rounds. The EIC can further set the crowd-in ratio of top-up grants to higher levels such as 9 or 12 since it is always a discount for investors.

There can also be a network effect whereas VC’s are incentivized to actively help their portfolio startups gain more investments to reach the EIC’s set top-up grant threshold. The EIC Accelerator can kill two birds with one stone by supporting far more DeepTech companies while at the same time reaching its mission far more effectively.

It can have its cake and eat it too.

Control, Limitations Or A Long-Term Vision?

There are a variety of ways to look at the current state of the EIC Accelerator and why it is leaning into equity investments to such a degree. Some are positive and some are negative but there is always room for improvement:

Control?

The EIC Accelerator is gradually becoming synonymous with DeepTech in Europe and along with it come a variety of perks and controls. Equity stakes in fast-growing companies, board seats, gatekeeping at conferences and other incentives can create the desire for more. These things can be helpful to companies as well but the same benefits for the companies could be reached through pure grants in the same way or even better.

The EIC does not need equity stakes to perform its mission. It likewise does not need board seats, control or the extensive due diligence process that is required for equity investments especially since the single award decision has been made long before the due diligence even begins and the EIC Fund generally acts as a co-investor, not a lead.

Gaining control and influence for public appearances and especially for political purposes could be one negative incentive to drive this approach but there could be alternative explanations.

Limitations?

There could be limitations imposed on the different types of budgets. It is suspicious that the equity budget exceeds the grant budget by such a large margin when considering the number of applicants for each segment. If there are certain legal restrictions on the allocation of the equity budget for grants and vice versa then switching to a Grant+ model would be challenging or impossible.

It would be helpful if the EIC could shed more light on its budget allocations and restrictions as it can help inform the ecosystem regarding the EIC’s decision-making process and future directions.

Long-Term Vision?

The most obvious explanation for the current EIC Fund strategy is the financial incentive whereas the EIC Fund portfolio is gradually growing and can create a significant VC-type return over the coming decades. This funding can then be funneled back into startups and the EIC Accelerator can grow organically whereas its budget is both publically and self-funded.

But this consideration, while it seems obvious on the surface, has its flaws:

Unnecessary

If the EIC Accelerator successfully crowds-in private investors, the number of private investments will likely grow over time since DeepTech investments become more and more popular while returns are bound to flow back into VC funds. The EIC can be one of those funders who gains returns and reinvests them but it does not have to be for the system to grow naturally.

The EIC can simply focus on crowding in more private investments in its DeepTech focus areas (i.e. Grant+ would be a stronger incentive than equity) as well as hand out more than double the grants which will make DeepTech twice as visible to private investors. Arguably, this approach would grow the ecosystem more.

Zero-Sum Game

If the EIC Fund reaches the point of being able to use returns to fund companies, what will the response of the budget makers be? Will the public financing for the EIC Accelerator be reduced or increased? There are a variety of ways to look at this but it is likely that the budget would be reduced since the EIC is able to self-finance part of its operations.

If that was the case then it would be a zero-sum game since the EIC would have to compensate for its reduced budget through its generated returns while VCs could grow their funds over time.

Even worse, if the EIC Accelerator budget was reduced to compensate for the EIC Fund returns, would the grant funding allocation be drowned out over time? If the EIC Fund gains significant returns in the future and the public funding for the program is reduced significantly in response, is there a mechanism for the EIC Fund to also fund grant activities or redistribute financing to grant budgets?

Considering how the EIC is handing control and ownership over to the EIB, it is less likely that grant funding can be accessed through this mechanism.

Nonetheless, the returns of the EIC Fund can present a significant variable in the future but it is currently unclear what their impact will be once they occur. If the publically-funded EIC Accelerator budget will never be reduced in response to the EIC Fund’s success then any windfall and asymmetric VC-type returns would be very positive for the program.

Sensitive Technologies

One last argument in favor of the current EIC Fund strategy is the protection of European interests in terms of sensitive technologies. Examples are semiconductors or AI where the EU has put certain safeguards in place to protect its regional interests. Equity investments might be a superior way to deal with such issues but there are other legal ways to create control or oversight even in the case of grant funding.

Since the EU is providing the funding, it can set the terms. It can request a board seat regardless of its funding approach and there is no requirement for it to become a VC.

Conclusion

The EIC could focus on providing pure grants to companies and phase out its equity investment experiment since it might not be the best way to reach its primary goal: Crowding-in private investors and bridging the valley of death for DeepTech.

It could provide Grant+ instead of blended finance where it pays a maximum grant of €2.5 million with up to €3 million (or more in some cases) of follow-up grants bound to specific funding rounds and milestones. A non-dilutive grant acts as a discount to lead investors and will make DeepTech companies significantly more attractive to private markets while EIC Fund equity investments are somewhat de-risking but are not financially incentivizing private investors.

Grant+ can be viewed as a coupon code or VC dowry for joining the next funding round in this high-risk DeepTech startup and the EIC can experiment with different structures (i.e. adjusting the grant to specific valuations or planning for 1-2 follow-up rounds).

This article was last modified on Jun 12, 2024 @ 13:15

These tips are not only useful for European startups, professional writers, consultants and Small and Medium-Sized Enterprises (SME) but are generally recommended when writing a business plan or investor documents.

Deadlines: Post-Horizon 2020, the EIC Accelerator accepts Step 1 submissions now while the deadlines for the full applications (Step 2) under Horizon Europe are:

Step 1
- Open now: Apply as soon as possible to be eligible for the next Step 2 submission deadline
Step 2 (closing 17:00 Brussels Time)
- 1^st cut-off 2025: -
- 2^nd cut-off 2025: March 12^th 2025
- 3^rd cut-off 2025: -
- 4^th cut-off 2025: October 1^st 2025
Step 3
- 4^th cut-off 2024: January 13^th to 17^th 2025
- 1^st cut-off 2025: TBD
- 2^nd cut-off 2025: TBD
- 3^rd cut-off 2025: TBD
- 4^th cut-off 2025: TBD

The Step 1 applications must be submitted weeks in advance of Step 2. The next EIC Accelerator cut-off for Step 2 (full proposal) can be found here. After Brexit, UK companies can still apply to the EIC Accelerator under Horizon Europe albeit with non-dilutive grant applications only - thereby excluding equity-financing.

Contact: You can reach out to us via this contact form to work with a professional consultant.

EU, UK & US Startups: Alternative financing options for EU, UK and US innovation startups are the EIC Pathfinder (combining Future and Emerging Technologies - FET Open & FET Proactive) with €4M per project, Thematic Priorities, European Innovation Partnerships (EIP), Innovate UK with £3M (for UK-companies only) as well as the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) grants with $1M (for US-companies only).

Any more questions? View the Frequently Asked Questions (FAQ) section.

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by Stephan Segler, PhD
Professional Grant Consultant at Segler Consulting

General information on the EIC Accelerator template, professional grant writing and how to prepare a successful application can be found in the following articles:

A Quick FTO Guide for EIC Accelerator Applicants in a Rush

2023 Budget Allocations for EIC Pathfinder, Transition and Accelerator

Developing the Unique Selling Points (USP) for the EIC Accelerator

Explaining the Resubmission Process for the EIC Accelerator

A Short but Comprehensive Explanation of the EIC Accelerator

EIC Accelerator Success Cases

Deciding Between EIC Pathfinder, Transition and Accelerator

A Winning Candidate for the EIC Accelerator

EIC Accelerator Interview Preparation Process: Scripting the Pitch (Part 1)