EIC Accelerator: info on blended finance (grant+equity)
This information has been updated based on the EIC Fund Investment Guidelines v. 3.0 published 22.04.2021. A copy of the document can be browsed here under for more information.
What are the ‘conditions’ of the EIC Fund investment?
The companies must fall within the EIC Fund’s investment focus namely:
- Be established and operating in EU countries and Horizon Europe Associated Countries.
- Be mainly in pre-seed seed and early stage SME and present a high technology component (but not restricted to tech).
- Be a company classified as a ‘Small mid-cap’ (up to 500 employees) established in a Member State or an Associated Country, but your application can only be for rapid scale up purposes (e.g. Technology Readiness Level 9) and only for the investment component.
- Be interested in receiving an investment by EIC Fund primarily in the form of quasi-equity or equity.
- Be positively evaluated (Go decision) for blended finance under the EIC call.
Which are the options for the investment?
The EC will select those Accelerator actions to support and award an indicative EIC blended finance amount, which may under conditions consist of a grant only, or a grant first with potential subsequent investment, or and if so requested only an investment support.
How much money can we ask for?
The EC will allocate a maximum total funding (grants and equity) of EUR 17.5m (EUR 2.5m grant + EUR 15 m equity) to the recipient companies to bring their innovations to the market.
When do I have to decide for grant first, grant only or blended finance?
You will be asked to provide overall sums and indicate the time of funding already in Step 1 of the 3 step process. However, this is only an indication and only once completing Step 2 your ask will become binding.
Can I apply for grant only?
Yes, if you can provide evidence that you have sufficient financial means (e.g. revenue flow, existing investors or shareholders) to finance the deployment and scaling up of your innovation.
Can I apply for equity only?
Yes, applicants can choose to request the investment component only and are not required to request a grant component. Ongoing grant-only projects (including those funded under the Horizon 2020 EIC pilot Accelerator) can only apply for a related investment component under an EIC Accelerator call. Small mid-caps (i.e. companies that do not comply with the definition of an SME but have fewer than 500 employees) can only apply for the investment component and are not eligible to receive the grant component.
Can I apply for grant only and then change my mind?
No, but you have the option to apply for the “grant first” option. Grant-first companies are eligible for a follow on equity component subject to a milestone assessment attesting that the innovation activities are well under way and that the innovation has the potential for deployment.
Can you tell me more about the equity component of the new funding scheme?
The EIC Fund equity investment (usually in the form of equity or quasi-equity such as convertible loans) will range between EUR 0.5m and EUR 15m per company (directly provided and managed by the EIC fund). In future years, the investment component may also include reimbursable advance, loan guarantees and other forms of financial instruments. Within the maximum budget awarded by the Commission to the EIC Fund, the terms of investment will be negotiated on a case-by-case basis by the EIC Fund.
The EIC Fund will (when applicable) target minority ownership stakes (from 10 to 25%), and up to a blocking minority in cases identified by the EC as of strategic interest for the EU. It shall avoid situations where it holds majority stakes and control, unless resulting from external and unforeseen circumstances. Investments will normally be made with a long average perspective (7-10 years) with a maximum of 15 years (‘patient capital’).
What activities can I cover with the equity component?
It is intended to finance market deployment and scale up but may also be used for other purposes (including co-financing or even fully financing innovation activities).
Equity provided to the company can hence be used to cover any TRL9 related expenses, but also to provide for the 30% co-financing of the TRL6 to 8 activities covered by the 70% grant: equity is an asset of the company that can use the way it sees best.
The activities of TRL 9 or above will cover activities in preparation for the innovation to be ready for full-scale operations as well as commercialisation activities.
The application form will detail which activities are supported by the grant and which will be covered by the equity and/or other sources of funding if any. This will be reflected in both the Grant Agreement and the Investment Agreement.
For blended financed project, when do I have to start the equity-funded part of the work?
The grant action will start on the date stated in the grant agreement, following its entry into force of the grant part. For the equity investment, after due diligence is positively concluded, various options will be possible depending on the timing of the equity needs. The equity agreement will provide schedule of tranches of investment, which may be based on milestones.
Will there be a due diligence?
Yes. The due diligence process will focus on the following aspects contributing to the detailed risk assessment of the potential investment:
- Governance and quality of the company’s management
- Capital structure and financial planning
- Business strategy
- Competition
- Market assessment
- Alternative sources of financing
- Value creation
- Legal form and jurisdictions
At least 6 months must be planned for the completion of the due diligence.
What will happen if we get a rejection?
Compared to the evaluation process run by EISMAE, the EIC Fund’s pre- and due diligence are by definition a more in depth examination of an operation. Whilst its purpose is not to re-evaluate the proposal or question the opportunity of the EIC Accelerator support awarded by the EC but to implement its investment component, findings may lead to question the legality or the rationale of the operation.
Negative issues include fraud, misrepresentation, refusal or failure to submit requested information, manifest error of appreciation by the EC, substantial negative changes of circumstances (Material Adverse Changes - MAC) as compared to those existing at the time of the initial EC award, reputational risk for the EU, and other findings affecting the financial interests of the Union.
How will the evaluation for the equity component be carried out?
Following an assessment, the EIC Fund will classify the proposals for the Equity Component of the blended finance applications into four types of investment scenarios, translated into the buckets presented below:
- Bucket 0: No Go. This bucket will include cases for which initial assessment or due diligence, at any stage, reports substantial negative issues preventing any investment
- Bucket 1: Low maturity and failure to attract co-investment. Bucket 1 will include cases that are not sufficiently mature for regular investors, due to remaining very high risk despite the awarded EIC Accelerator support.
- Bucket 2: Bucket 2 will include cases where potential investors show immediate interest in co-investing into EIC selected companies.
- Bucket 3: Bucket 3 will include cases where potential investors show immediate interest in providing the full investment into EIC candidate companies.
While the Accelerator will aim to ensure founder friendly terms to preserve the value of the founders, investor friendly terms will need to be equally considered to attract potential private capital. Moreover, it is of utmost importance that the EIC Fund does not create market distortion and caters for its high-risk target.
How will the company valuation be assessed?
Methods for the valuation of the companies could vary case-by-case depending on business models, markets and sectors, technology and other intangible aspects to consider in evaluating a start-up company. For ease of reference, some methods commonly used in the VC market are listed below:
- Multiples of Earnings: For a start-up, it is usually considered a Times Revenue Method (sometimes it could be applied on an expected value). This formula calculates a business’s maximum worth by assigning a multiplier to its current revenue. Multiplier benchmarks vary according to industry, economic climate, and other factors.
- Fair Market Value: it reaches the value of a company by comparing it either to similar businesses that have sold previously or to a peer group of comparable companies listed on the stock markets.
- Book Value: It takes into consideration the value of the business’s equity by taking into account the market value of the assets (not the accounting value in the financial statements), intangible assets (goodwill created at the time of the valuation) minus total liabilities (eventually adjusted if there is a relevant swing in the cost of debt).
- Price of recent investment: takes account of the valuation used in a recent previous investment in the company, then estimates the current valuation based on the value creation from that reference point.
- Discounted Cash Flow: it values a business based on its projected cash flow discounted by a factor (usually the average cost of capital). The result is present value. It is more often applied to companies in growth or mature stage as cash flow generation is needed.
- Other asset-Based methods: among several other asset based approaches there is the liquidation value.
The above-mentioned methods are market references for valuation purposes and tools for companies in their negotiations with potential investors. Such negotiations are often time consuming and interfered by intangible factors such as bargaining power, which will significantly influence the valuation. The EIC Fund can provide support and advice to investee companies via the Investment Advisor or external mentors.
Which form will the equity or quasi-equity from the EIC take?
- Common shares: represent an ownership interest in a corporation, including an interest in earnings and dividends. They may be voting or non-voting and may be divided into classes with special voting privileges assigned to each class. In the VC market, founders and management team usually hold common shares.
- Preferred shares: represent a hybrid in the sense that it is an equity interest with debt-type features such as seniority at dividend payments and liquidation proceeds. VC funds usually hold preferred shares.
- Convertible instruments: like convertible loans, have a convertibility feature attached to a debt instrument that is attractive to the issuing company, since they bear a lower interest rate and postpone dilution. They offer flexibility to investors allowing them to shift the risks and rewards of their investment to some point in the future after the initial investment.
- Other equity-type instruments appropriate to achieve the objectives of the EIC Fund.
How long will the EIC invest in our company?
The EIC Fund will invest patient capital, with a long average perspective on return on the investment (7-10 years) with a maximum of 15 years. There are no pre-defined levels of returns sought (this will be examined on a case-by-case basis) – the EIC objective being “impact investment” rather than maximizing return on the investment.
The exit strategy for each company is to be set on a case-by-case basis given the specificities of each business plan, industry, expected holding period as well as the development of the companies compared to the initial milestones set. Exit routes may include IPOs, management buy-outs, secondary sales or liquidations.
How and when will the equity money be released to our account?
Under EC coordination, the timing and conditions for disbursement in tranches (upon achievement of predefined milestones) will be negotiated and managed by the EC for the grant allocations, and by the EIC Governing Body (advised by the EIB) for the equity investments. A material breach of the grant agreement shall prevent the EIC Fund to further invest in a company and eventually lead to exit, and vice-versa.
For the purposes of these guidelines, milestones will be meaningful achievements in the development of the innovative project of a company.
The funding tranches (grant + equity) shall fund the activities of the company until the expected reach of the relevant milestone.
Will the EIC Fund want to be the sole investor?
No. Whenever possible, the EIC Fund will co-invest with other investors, such as VCs, NPBs or corporate venture arms, to crowd in private financing and mobilise additional capital.