Should the EIC invest in startups?

This week the European Commission announced the first round of direct equity investment through the new European Innovation Council (EIC) Fund. 42 start-ups and SMEs will together receive equity financing of around €178 million. Read the press release here.

At the same time POLITICO Europe wrote an article that this same EIC fund “ has actually left some of them (the startups) on the verge of bankruptcy”. You can find that one here.

Is money going to the right startups?

I’m torn between two sides. I’ve seen for myself that hardware startups (in non-traditional industries) can have a hard time finding funding. Compared to a SaaS startup these hardware startups have higher risk and longer development times, and therefore not always fit the “ideal investment” of a VC.

Personally I’m also slightly annoyed when I see yet another SaaS startup getting investment after investment, and knowing that at the same time there are medtech, quantum or cleantech startups struggling to survive. If you take the society’s perspective you can safely assume “our” money would be better spend in the cleantech corner than in the app & platform corner. The VCs are not investing in what we, as a society, really need. Read this excellent article on the subject, it really goes in depth.

Trust is build through people, not through paper

On the other hand: the EIC is not a VC and this becomes most apparent when you compare their processes building up to an investment (mind you there are numerous differences, but this one is, to me, the most important):

• A VC starts with the pitchdeck (a 10–20 slides PPT), when they like it, they will try to meet as soon as possible with the startup. After a few meetings with founders and perhaps management teams (or some employees), they will sign a term sheet and perform a due diligence (the paperwork and the details). After the DD an investment board will decide on the investment.
• The EC starts with a written proposal (often 50–100 pages), and if you get through the remote evaluation you are allowed to pitch to an interview board. What happens afterwards is unclear from their many websites (I assume there is also a DD and a decision from an investment board). In many ways the process looks similar to the way they hand out H2020 grants.

Where the VC uses the pitch deck to open up a personal discussion with the founding/managing team and only then goes into the details, the EIC forces the startups to go into the details before they become personal (and even then, you pitch before a board which you will never see again, at least most of them).

Sharing the same culture

While going through the many websites, forms and processes of the EIC it dawns on me that there is yet another difference, but this one is much broader than the investment process. All these forms, processes and documents are there because the EIC does not share the same set of unwritten rules (or norms) the VC and the startup do share.

The EIC has not been a part of the startup/VC ecosystem, which means they have not shared the same culture and do not share the same norms from the start. Even if the EIC hires a huge number of former VC-employees, or former entrepreneurs, the entrepreneurial culture I am talking about is not simply copy-pasted into the EIC. Therefore it will be even harder to build trust, to communicate clearly, and to bridge the differences (which becomes apparent in the Politico article).

Teach the culture

Be aware that the money from the EIC is not a (horizon 2020) grant. The beauty of grants is that you are stuck together until the project is done (months, years) and the grant money does not “buy” influence on company level. Once the EIC becomes a shareholder you are stuck with the EIC for a long time (I could not find clear information in the exit strategy of the EIC) and they have influence on every level. Being stuck with people is not necessarily a bad thing, but know that you are not sharing the same culture, the same set of unwritten rules or norms you do share with your local VC.

This means that you have to accept that you have to get through a whole lot more forms and documents, and have to communicate more clearly and more often then you are probably used to.

However, the beauty of culture is that it can be taught. Or maybe better: it can be shown. When you are onboard with the EIC make a point of explaining your set of norms, explain your company culture, explain how your relationship with other VCs is. Show them the (local) entrepreneurial ecosystem and instead of getting wrapped into their document heavy environment show the EIC the beauty of #payingitforward and trust in general.

When the EIC makes a point of adjusting its culture towards a more entrepreneurial one, will start to play an active role in the ecosystem and accept a spot as a non-lead investor, I see no problem with a European minority (<10%) shareholder to give European hardware startups a much needed push in the right direction.