Since the start of his mandate in 2014, European Commissioner Carlos Moedas has been in strong support of the setting up of a European Innovation Council (EIC) for breakthrough, market-creating innovation, with a focus on smart funding, smart investment and smart regulation, to make Europe 'the place to be' for innovators.”
This quote in the programme to the Innovative Enterprise Week Bucharest 2019 conference sums up the importance of the EIC to the commission’s strategy in the next budgetary cycle from 2021 to 2027 – called Horizon Europe – and how effectively impact investing is already underpinning its thinking.
An EIC pilot initiative was launched in October 2017 with a budget of €2.7bn ($3.1bn) of combined and re-focused existing funding schemes to ensure funding reached innovators through a Pathfinder scheme to support researchers in future and emerging technologies (FET) and an Accelerator as a blended finance model combining grants with potentially equity.
Hermann Hauser, chairman of the 15-strong High-Level Group of Innovators advising on the design of an EIC in Horizon Europe in a two-year mandate just finishing, described the decision of the European Parliament to support an equity tranche of up to €15m per successful applicant as “surprising” and in a keynote laid the credit at Moedas’ feet for pushing through the EIC in a similar search for “excellence” as the highly-regarded European Research Council.
While the three-year pilot has €2.7bn allocated to finish next year, the full EIC was expected to have €10bn for the Horizon Europe budgetary period, Hauser said. However, two insiders at the European Investment bank (EIB), which is expected to run the EIC rather than its subsidiary the European Investment Fund that had originally been given the lead role, said the likely final allocation would be up to 20% less given negotiations still underway in the European Parliament and taking into account the UK’s potential exit from the EU as soon as October 31.
The EIC pilot allocated €778m last year to 250 projects out of at least 6,000 applications and is expected to invest about €1bn this year. Adrian Kamenitzer, director of equity, new products and special transactions at the EIB, said the EIC would try and select companies that could benefit from the capital through flexible structures and then crowd-in two to three times the funding through outside investors.
The EIB, through its innovation finance advisory service led by Shiva Dustdar under Simon Barnes as overall head of advisory services at the bank, will also support applicants with mentoring and as due diligence on the potential equity tranche is also being carried out.
Stéphane Ouaki, head of unit for the directorate general of research and innovation at the European Commission, in a keynote laid out the process for the EIC Accelerator and the creator of what is expected to be called the EIC Fund to handle the investments.
The fund manager has yet to be appointed but Ouaki in the subsequent panel discussion said it was expecting 70% to 90% of portfolio companies to fail given the focus on FETs and it was unclear if the remaining success stories would make up for the losses given the opportunity other investors have to buy out the EIC fund at the earliest opportunity.
This focus on performance and strategic support to entrepreneurs is effectively an impact investing strategy when taken into account with the Horizon Europe’s targets around investing for “people and planet”, insiders at the conference said.
Analysis by the EIB of its work showed it was already supporting 16 of the 17 sustainable development goals (SDGs) set out by the United Nations. Effectively, the EIB is taking its market and infrastructure focus and adding in SDGs and so moving closer to other supra-national agencies, such as the World Bank and the US Agency for International Development, that are moving in the other direction and trying to crowd in private capital and market instruments to their development targets.
Doing so could help unlock the estimated $20 trillion in capital on corporate balance sheets and billions allocated to corporate venture capital as well as family office money. One example of such an approach was given by Julia Reinaud, director of advocacy and government relations at Gates Ventures, the family office-backed investment firm set by up by Bill Gates, co-founder of software developer Microsoft. Reinaud showed how a coalition of corporations, such as Engie, National Grid and Total, alongside a stack of individuals and the European Commission had come together in 12 months to set up Breakthrough Energy Europe as a €100m pilot venture fund. As one government insider at the conference said: “We need exponential thinking. Adding €10bn is about three months-worth of venture capital funding. How do we get trillions working?” u
Romania’s opportunities are Europe’s
It is perhaps a moot point which of the European Commission and the Romanian government comes off as less impressive at the Innovative Enterprise Week Bucharest 2019 conference for the lack of discussion of home-grown, robotic process automation provider UIPath’s meteoric rise in the past few years but the absence was definitely noted among attendees.
In some ways, UIPath’s development is the perfect example encompassing so much that is great and promising in Romania and Europe currently, while still retaining the ability for an obvious own-goal.
For those who have also missed UIPath’s development in the past few years from startup into Romania’s largest public or private company, by market valuation at about $7bn it dwarfs the local oil major, Petrom, which was valued at about $5bn in 2017 according to local financial daily Ziarul Financiar.
However, after debating moving to the UK, UIPath shifted in headquarters to the US to be closer to its main investors, including corporate venturing unit CapitalG, part of the Alphabet internet conglomerate that operates the Google search engine, although its main management and a sizeable office remains in Romania.
UIPath had been raising a $400m series D round this year at more than $7bn valuation, according to press reports, having previously raised about $409m since its foundation in 2005, news provider TechCrunch said.
Although supported by local VCs, such as Earlybird and Credo, its later money came from top US investors, such as Sequoia and Accel, as well as CapitalG, which co-led the C round.
An insider at UIPath said Europe’s problem now remained this scale-up funding rather than early-stage investment – something which the EIB has been working on for years through its EIF subsidiary acting as a limited partner with about €6bn committed to VC funds and now increasingly as a direct investor in startups. The EIB, however, has struggled to attract or encourage local corporate venturing units to set up or invest locally, something insiders admitted was a source of frustration.
That US corporations and VCs seized the opportunity to fund UIPath and bring it to the US when potential European corporate venturers and VCs remained on the sidelines points to the increasing view that Romania, like much of Europe, is a good nursery for attractive entrepreneurs at reasonable valuations but those with global ambitions have to be based in the US or China.