Our ambition for the next EU budget

France Digitale is seizing the opportunity of the European Commission’s consultations on “EU Funding for Competitiveness” and “Performance of the EU budget” to send out a strong message: Europe must give itself the means to achieve its ambitions and enable the success of European innovation and tech champions to ensure our position on the world stage and our long-term prosperity.

Calls for a European “growth”, “competitiveness” agenda have been in the political discourse since the Lisbon Strategy of 2000. With the Draghi report, it has been made clear that the technology and innovative sector of our economy will play a key role in achieving this goal.  

But unlike agriculture, trade, competition and (for the Euro-zone) monetary policy, industrial and innovation policies have never really been coordinated at EU level. While the desirability of a European industrial policy is still up for debate, it is undeniable that this lack of coordination has resulted in two decades of limited and scattered EU funding for innovation. This, in turn, has often led to duplication or overlap with national schemes, poorly linked with research and the absence of clear measures of  success.

While EU funding channeled through the European Investment Bank group has played a key role in structuring the European venture capital industry, direct funding to startups through the EU budget has had a less structural impact. In both cases, however, vision, amounts and instruments in place have been insufficient to turn Europe into the world’s most competitive and innovative region in the world.

To address this gap, in this note we formulate recommendations to improve the impact and efficiency of EU funds devoted to innovative companies, notably startups and their investors, based on their direct experience. 

But these improvements will not, alone, be enough, to achieve the common goal of making Europe a globally competitive market and a leader in the next generation of innovations.

We need a strong, coordinated EU innovation policy, that sets a clear vision and common direction for national and EU funding. For us, that sense of purpose is clear: contributing to the emergence of European tech champions. 

To that end, the EU and EIB budgets will also have to work in coordination with other macroeconomic policy instruments: competition, trade, research and monetary policy, in time even national fiscal policies.

Only then will we be able to turn innovation from a small budget line into a strategic tool of European macroeconomic policy in the service of our vision for a competitive and prosperous Europe.

 

Summary of our recommendations

• The EIB and EIF play a structural role for VCs whereas direct funding has a less structural impact for startups.
• The EU funding is seen as a complementary to the national one, more accessible and predictable.
• The EIF as an LP reassures other LPs but the due diligence process is long (up to 18 months) and the reporting is expensive in terms of time and workforce. Moreover, policy-driven investment priorities limit secondary investment and liquidity for the investors.

• Only 5% of EU Framework Programs’ budget (ie. Horizon Europe, Erasmus+) is allocated to startups.
• None of the interviewed startups benefited from Digital Europe Program.
• Consortia are difficult to create for startups
• Grants are useful at early stage and for R&D but less for scaling
• EIB guarantees and loans are little known and underexploited. They are made for larger companies and not adapted to scaleups.
• The EIC is appreciated, especially its two-stage application procedure that lightens up the first phase of the application. But it has only 5% success rate.

• Strengthen the supply chains to reduce dependency:
  • circular economy can reduce the reliance on the import of rare materials
  • increasing procurement in EU tech can also diminish dependency
• Financing urgent priorities (ie. defence) should not come at the expense of long-term objectives (green and digital transition).
• Given its limited size, the EU budget should complement national and private funding where market gaps exist, de-risking and boosting confidence.
• Have a clear and consistent communication on how many and which funds finance the same priorities, and on the performance of the EU budget so far. Avoid rebranding since it leads to confusion (ie. InvestAI uses Horizon Europe and Digital Europe funds, Choose Europe uses Horizon Europe too).
• Expand the EIC budget
• Privilege public procurement over grants: it provides cashflow and track record vis-à-vis other consumers
• Require large companies receiving public funds to apply an EU preference

• Success should be measured on results (ie. commercial vialability & financial sustainability criteria) rather than processes and reporting
• Not just grants: expand financial instruments for a long-term ROI
• Explain the reason behind the selection of winners and exclusion of losers, clarify what is the room for improvement so that candidates are motivated to apply again. Hand-out seals of excellence to good candidates to encourage them to re-apply after failure.
• Reduce administrative burden to avoid the systematic use of consultancy firms.
• Ensure that the management and evaluation of calls is in the hands of experts in the applicants’ field (EIB or EIC).

• Enter info VC funds early so that the EIF commitment can be used as a signal for other investors
• Continue and expand InvestEU programs, provide more clarity to VCs on it.
• establish clear contact points for VCs within the EIF
• Remove requirements for fixed public/private ratio or establish a two-tranche system
• Relax the 60/40 rule to allow more flexibility for secondary investments.
• Use the EIF leverage to attract more institutional investors to European VCs:
  • Create a European VC Initiative: an EIF-managed fund-of-funds pooling resources of pension, insurance and saving funds.
  • Connect European VCs with European institutional investors through ie. matchmaking.
  • Communicate more on the impact of the EIF fund of funds activity to attract and reassure private LPs.
• The European Tech Champion Initiative 2 should no longer apply the 1 billion AUM eligibility threshold. 87% of French VCs have <1bln € AUM
• include “health” among fields recognised in ESG reporting to meet the criteria to receive EU funds. Healthcare solutions have positive social impact.
• Make engagement of retail investors easier and faster, harmonise different processing times of national Financial Market Authorities.