14 Things You Should Know About Blended Finance in EIC Accelerator
Blended Finance is the new standard in the EIC Accelerator. But what exactly does it mean for applicants?
Blended finance will be the new standard in the EIC Accelerator from 2021 after an 18-month pilot phase. In specific terms, this means that applicants in the EIC Accelerator will no longer apply for pure funding (non-repayable grants), but that the European Commission will additionally step in as an investor in the respective companies on top of the funding. But don't worry: under certain conditions, the so-called "grant-only" funding will still be available in the future. Feel free to contact us and we will check together whether this option is suitable for you.
We have summarised for you how blended finance works and what advantages and disadvantages may arise:
1. More comprehensive and longer-term support: While pure project funding targets a short-term horizon (up to 24 months), a combination of funding and financing enables more comprehensive support for business growth over a much longer period (typically 7-10 years). While the grant is usually disbursed in three tranches, the financing component has foreseen an average of five tranches.
2. Higher project volume: By involving public and private investors, it is possible to significantly increase the total amount of project financing. This brings additional security in the daily business.
3. Replaces the financing round: For companies that are, for example, between the Seed and Series A stage, an EIC Accelerator project can replace or usefully supplement the next financing round. Companies can thus receive a non-dilutive investment in the form of a grant combined with an investment that is fully targeted on the successful outcome of the project.
4. Patient capital: Blended finance supports projects with high risks and high market opportunities that are not (yet) attractive to ordinary investors and banks. Blended finance is patient capital. This means that it is available to the company for longer than is the case with typical venture capital (VC) investments.
5. EU? EIC? EIB? Who invests at the end of the day? In specific terms, the investment is carried out by the EIC Fund, which was set up specifically for this purpose. The resources within the EIC Fund come directly from the budget of the European Commission. The EIC Fund itself is set up, advised and managed by the European Investment Bank (EIB). Later on, the EIC Fund will be opened to other public and private investors.
6. Co-investors: The capital does not usually come exclusively from the EIC Fund. As part of the due diligence process, the EIC Fund looks for one or more co-investors. For this purpose, the European Commission has built up its own pool of vetted and trustworthy investors. These invest in equal shares (pari-passu). The applicant can also propose co-investors himself or reject the Commission's proposals.
7. Due diligence risks: To secure the investment, a due diligence will be conducted in advance. This includes, among other things, the verification of various information (e.g. competition, market, patents, finances), but also the search for possible co-investors as well as the determination of the current company valuation. In the worst case, negative due diligence can lead to project termination. Under certain circumstances, a project implementation without investment (grant-only funding) is also conceivable.
8. And how much is my company worth? Various IPEV (International Private Equity and Venture Capital Valuation Guidelines) methods can be used to valuate the company, including discounted cash flows, for example. This is a post-money valuation, which means that it includes the funding from the EIC Accelerator. The company submits an initial assessment when it submits its application. The final evaluation is then carried out either by a co-investor or by the EIC Fund. The evaluation is negotiable. The final vote is taken with the involvement of the founders, existing investors and any new co-investors.
9. Funding now, invest later: Especially for very young companies that still have a low valuation, the European Commission has introduced a so-called "grant first" option. The purpose of this option is to apply for blended finance in principle, but to negotiate the company valuation at a later point in time in order to be able to demonstrate a higher company value.
10. Quasi-equity and convertible loans: Depending on who ultimately invests in the company, the nature of the investment may change. In a common investment of EIC Fund and co-investor(s), the preferred vehicle of choice is quasi-equity. On the other hand, if the EIC Fund is the only investor, the investment will most likely be a convertible loan. So, depending on the scenario, it will determine whether blended finance has an impact on the ownership structure of the company or not.
11. Founder- and entrepreneur-friendly: Compared to typical VC investments, the blended finance option should be more founder- or entrepreneur-friendly. Specifically, this means better valuations, better investment conditions and openness to additional co-investors. It should also be possible to supplement the EIC Fund with own investors during the lifetime or to replace it completely.
12. Blended Finance is used where funding no longer applies: National and European state aid rules prohibit support for the marketing of products and solutions that are ready for series production (TRL9). With blended finance, the European Commission has therefore created an opportunity to support its "champions" longer and more comprehensively.
13. More money, more reports: Blended Finance entails additional reporting requirements besides the usual progress reports for funded projects. These are determined individually for each applicant and may include business/technological activities, financial performance, achievement of set milestones or even specific tax-related reports.
14. Exit scenarios: The European Commission provides for an exit at market conditions. The founders or owners of the company have the option to buy back the shares from the EIC Fund once the innovation has matured and support is no longer required. The conditions are negotiated individually.
Blended finance offers a great opportunity for applicants to bring their innovations to market even faster and to operate more securely due to the additional capital buffer. At the same time, the model is not equally suitable for every company and also carries risks, such as additional auditing and reporting requirements, a possible dilution of company shares, or even premature project termination.
If you would like to find out whether blended finance or the grant-only option is more suitable for your company, we would be happy to advise you without any obligation. Find out more about our grant advice or arrange your personal appointment right away!
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Author: Stefan Durm
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I have been successfully involved in international projects for around 10 years. I have designed and coordinated international research consortia as well as (co-)developed and successfully implemented more than 50 business plans for highly innovative deep-tech start-ups. To keep sharpening my knowledge, I am a founding member of the European Association of Innovation Consultants (EAIC) and represents EurA there. Therefore I am always a very good first point of contact for questions about international funding projects.
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