Version: December 2023

Note: This article contains a summary of the official EIC Fund investment guidelines and contains simplifications that can change the intended meaning in some cases. We recommend to download and read the official document.

Introduction

The EIC Investment Guidelines provide essential information to potential beneficiaries and co-investors regarding the strategy and conditions for EIC Fund investment and divestment decisions. This updated version includes definitions of qualified investors, descriptions of investment scenarios, and new clauses on follow-on investments and exits, ensuring support for high-potential startups and SMEs to accelerate growth and attract additional investors. This document applies specifically to the EIC Fund Horizon Europe compartment.

Table of Contents

1. Investment Rules
   • 1.1 Investment Restrictions
   • 1.2 Investment Objective
   • 1.3 Investment Strategy
   • 1.4 Compartment Investment Process
2. Investment Guidelines
   • 2.1 Target Company Development Stage
   • 2.2 Type of Innovations
   • 2.3 Protection of European Interests
   • 2.4 Geographical Scope
   • 2.5 Exclusions
   • 2.6 Investment Size and Equity Stake Targets
   • 2.7 Investment/Co-Investment Scenarios
   • 2.8 Due Diligence Process
   • 2.9 Possible Financial Instruments
   • 2.10 Investment Implementation
   • 2.11 Publication of Information
   • 2.12 Monitoring and Follow-Up Investments
   • 2.13 Follow-On Investments
   • 2.14 Mentors
   • 2.15 Intellectual Property Management
3. Investment Buckets
4. Annex 1. Definitions
5. Annex 2. Exclusions

1. Investment Rules

1.1 Investment Restrictions

The Compartment is subject to the Investment Restrictions set out in the General Section of the EIC Fund Memorandum. These restrictions ensure that the Compartment operates within the boundaries established by the EIC Fund, maintaining consistency and alignment with the overall objectives.

1.2 Investment Objective

The objective of the Compartment is to invest in EIC Fund Final Recipients developing or deploying breakthrough technologies and disruptive, market-creating innovations. The Compartment aims to address a critical financing gap in the European technology transfer market. Despite significant grant funding for research and innovation projects in Europe, very few manage to attract further investment and reach commercialisation and scale-up stages.

1.3 Investment Strategy

To achieve its Investment Objective, the Compartment may invest directly in equity securities or equity-related securities, including preferred equity, convertible debt, options, warrants, or similar securities. The Compartment provides the investment component of the EIC blended finance, subject to the maximum investment amount set by the EU Commission.

Candidate companies apply to the EIC Accelerator through public calls for proposals published by the EU Commission. The EISMEA evaluates these proposals, and the EU Commission selects those to be supported with an indicative EIC blended finance amount. This support may consist of a combination of a grant and investment, grant-only, or investment-only support.

In cases where European interests in strategic areas need protection, the EIC Fund will take measures such as acquiring a blocking minority to prevent the entry of new investors from non-eligible countries. This approach ensures that investments align with strategic priorities and protect European interests.

1.4 Compartment Investment Process

The investment process involves several steps:

1. Initial Assessment: Proposals selected by the EU Commission are channeled to the External AIFM for initial assessment.
2. Categorization: Cases are categorized into various investment scenarios (Buckets) based on the assessment.
3. Due Diligence: Financial due diligence and KYC compliance checks are performed on target companies.
4. Financing Terms Discussion: Potential draft financing terms are discussed with the beneficiary and co-investors.
5. Decision Making: The External AIFM decides on financing operations, approving or rejecting the operation.
6. Legal Documentation: Upon approval, legal documents are prepared and signed.
7. Monitoring: The External AIFM monitors the investments, including milestone disbursements, reporting, and exit strategies.

2. Investment Guidelines

2.1 Target Company Development Stage

Eligible applicants under the EIC Accelerator include for-profit, highly innovative SMEs, start-ups, early-stage companies, and small mid-caps from any sector, typically with a strong intellectual property component. The EIC Accelerator aims to support high-risk projects that are not yet attractive to investors, de-risking these projects to catalyse private investment.

2.2 Type of Innovations

The Compartment supports various types of innovation, particularly those based on deep-tech or radical thinking, and social innovation. Deep-tech refers to technology based on cutting-edge scientific advances and discoveries, requiring constant interaction with new ideas and lab results.

2.3 Protection of European Interests

In strategic areas identified by the EU Commission, the Compartment will take investment-related measures to protect European interests. This may include acquiring a blocking minority, investing despite potential investor interest, or securing European ownership of intellectual property and the company.

2.4 Geographical Scope

Eligible companies must be established and operating in EU Member States or Associated Countries to Horizon Europe Pillar III Equity component. The External AIFM may invest in the holding or parent company established in these territories, provided it meets all eligibility criteria.

2.5 Exclusions

Investments exclude sectors incompatible with the ethical and social basis of Horizon Europe. These include activities related to harmful labor practices, illegal products, pornography, wildlife trade, hazardous materials, unsustainable fishing methods, and others as detailed in Annex 2.

2.6 Investment Size and Equity Stake Targets

The Compartment’s investment ranges between EUR 500,000 and EUR 15,000,000 per company, targeting minority ownership stakes typically between 10% and 20%. However, it may acquire a blocking stake to protect European interests. Investments may be lower or higher than initially proposed based on due diligence findings and the EU Commission’s award decision.

2.7 Investment/Co-Investment Scenarios

From the onset, the External AIFM will connect potential investee companies to the EIC Accelerator investor community to leverage co-investment opportunities. EIC Selected Beneficiaries are encouraged to seek co-investors, with financial and commercial due diligence potentially performed jointly with these investors. The EIC Accelerator aims to de-risk selected operations, attracting significant additional funding to support innovation deployment and scale-up.

2.8 Due Diligence Process

The due diligence process focuses on governance, capital structure, business strategy, competition, market assessment, value creation, legal form, and jurisdictions. Compliance checks include anti-money laundering, anti-terrorism financing, tax-avoidance, and KYC compliance. Non-compliance issues may lead to the interruption or cessation of EIC support.

2.9 Possible Financial Instruments

The Compartment primarily uses equity or quasi-equity investments, including:

• Common Shares: Ownership interest in a corporation, may be voting or non-voting.
• Preferred Shares: Hybrid equity with debt-like features, usually held by VC funds.
• Convertible Instruments: Debt instruments with a convertibility feature, such as convertible loans, bonds, notes, participation rights, and SAFEs.
• Other Equity-Type Instruments: Appropriate instruments to achieve EIC Accelerator objectives.

2.10 Investment Implementation

The External AIFM proceeds with the execution of investments, including closing legal documents and contracting with investee companies on behalf of the Compartment.

2.11 Publication of Information

Information about EIC Fund Final Recipients, such as names, locations, and investment details, may be published to ensure transparency and compliance with EU regulations.

2.12 Monitoring and Follow-Up Investments

The External AIFM manages individual investments, monitoring milestone funding, financing events, write-downs, restructurings, exits, and more. Qualified representatives or independent experts may be appointed to sit on boards of investee companies, ensuring proper oversight and strategic guidance.

2.13 Follow-On Investments

Follow-on investments are possible in exceptional cases, such as securing a blocking minority to protect European interests or supporting subsequent funding rounds. These investments must comply with Horizon Europe requirements and ensure consistency with state aid rules.

2.14 Mentors

The EIC Fund connects Final Recipients with its network of mentors, who provide business development advice and potential investment opportunities. In some cases, mandatory mentoring is required as a condition for investment.

2.15 Intellectual Property Management

While the Compartment allows autonomy in IP management to attract further investments, it seeks to secure European ownership of intellectual property where strategic interests are concerned. This approach supports the deployment of innovation and company growth, aligning with the Compartment’s objectives.

Investment Buckets

1. Bucket 0: Companies with substantial negative issues that prevent any investment.
2. Bucket 1: High-risk, early-stage companies needing significant support and de-risking.
3. Bucket 2: Companies ready for co-investment with immediate investor interest.
4. Bucket 3: Mature companies with full private investor interest, including listed companies.

Bucket 0

Bucket 0 includes cases where initial assessment or due diligence reveals substantial negative issues that prevent any investment. These companies are deemed unsuitable for investment due to significant risks, compliance issues, or other critical problems.

Characteristics of Bucket 0 Companies:

1. Substantial Negative Issues: Companies with major red flags identified during initial assessment or due diligence.
2. Compliance Problems: Non-compliance with legal, financial, or regulatory requirements.
3. High Risk and Low Potential: Companies that present high risks without sufficient potential for return or strategic value.
4. Insufficient Information: Lack of sufficient information or transparency to make an informed investment decision.

Investment Approach for Bucket 0:

1. Rejection of Investment: The Compartment decides not to proceed with investment due to the identified issues.
   • Immediate Disqualification: Companies in Bucket 0 are immediately disqualified from receiving investment.
2. Detailed Assessment of Issues: A thorough assessment is conducted to document the reasons for rejection and ensure that the decision is well-founded.
   • Documentation: Comprehensive documentation of the issues and the rationale for rejecting the investment.

Strategic Measures for Bucket 0 Investments:

1. Risk Mitigation: Identifying and documenting the risks that led to the rejection, to inform future investment decisions and improve the due diligence process.
   • Learning from Rejections: Using insights from Bucket 0 cases to refine investment criteria and processes.
2. Feedback and Guidance: Providing feedback to the company, where appropriate, to help them address the issues and potentially become eligible for future consideration.
   • Constructive Feedback: Offering guidance on what needs to be improved or resolved for future investment potential.

Potential Issues Leading to Bucket 0 Classification:

1. Fraud and Misrepresentation: Evidence of fraudulent activities or misrepresentation of information.
   • Integrity Concerns: Issues related to the integrity of the company or its management.
2. Legal and Regulatory Non-Compliance: Non-compliance with legal, regulatory, or ethical standards.
   • Sanctions and Restrictions: Issues related to sanctions, tax avoidance, money laundering, or other legal problems.
3. Financial Instability: Severe financial instability or insolvency without a clear path to recovery.
   • Unsustainable Business Model: Business models that are not financially viable or sustainable.
4. Reputational Risks: Potential reputational risks for the EIC Fund associated with investing in the company.
   • Negative Public Perception: Issues that could lead to negative public perception or damage the reputation of the EIC Fund.

Investment Strategy and Execution:

1. Thorough Due Diligence: Ensuring that the due diligence process is comprehensive and identifies all critical issues early in the assessment.
   • In-Depth Analysis: Conducting an in-depth analysis of financials, legal compliance, and business practices.
2. Clear Criteria for Rejection: Establishing clear and transparent criteria for rejecting investments to maintain consistency and fairness.
   • Objective Decision-Making: Ensuring that rejection decisions are based on objective, well-documented criteria.
3. Continuous Improvement: Using insights from Bucket 0 cases to continuously improve the investment process and criteria.
   • Feedback Loop: Creating a feedback loop to incorporate learnings from rejected cases into future investment strategies.

By categorizing companies into Bucket 0, the EIC Fund ensures that investments are only made in companies that meet the required standards and do not present unacceptable risks. This approach helps maintain the integrity of the investment process and protects the Fund’s resources and reputation.

Bucket 1

Bucket 1 includes cases where the potential investee companies are not yet ready for regular investors due to remaining very high risks despite the awarded EIC Accelerator support. This lack of readiness may result from various factors, such as the early stage of the underlying technology, long planned time to market, small market size relative to the investment needed, or the company’s low readiness to absorb additional equity.

Characteristics of Bucket 1 Companies:

1. High Risk and Early Stage: These companies are in very early stages of development, often with unproven technologies and significant uncertainties.
2. Long Time to Market: The expected time for the product or technology to reach the market is lengthy, making it less attractive to private investors.
3. Small Market Size: The potential market size may be small compared to the investment required, posing a challenge for scalability and profitability.
4. Low Readiness for Additional Equity: Companies may lack a robust management team, sufficient organizational structure, or a balanced cap table, making it difficult to effectively utilize additional equity investments.

Investment Approach for Bucket 1:

1. Investment Tranches: Investments in Bucket 1 companies are often made in multiple tranches to manage risk and ensure milestones are met.
   • First Tranche: The Compartment would invest up to 50% of the estimated investment or the company’s unfunded cash needs for up to 18 months, typically in the form of a convertible loan.
   • Convertible Loan Terms: These loans have a maturity of up to 18 months, with an 8% fixed interest rate, capitalized at prepayment or upon conversion, and a 20% discount rate at conversion. If no qualified round occurs by maturity, the valuation defaults to the post-money valuation from the last round or a lower amount if conditions have materially changed.
   • Second Tranche: The remaining investment is made in an equity round, contingent on private investors matching the total Compartment investment.
2. Conditional Investment: The Compartment may offer investments conditioned on specific achievements or milestones to ensure progress and mitigate risks.
3. Follow-On Support: Continuous support and monitoring are provided, with potential follow-on investments to address new developments and maintain company growth.

Strategic Measures for Bucket 1 Investments:

1. Board Representation: The Compartment seeks a board seat in target companies to ensure active involvement in strategic decisions and company oversight.
2. External Mentoring: Mandatory external mentoring is often required to address company shortcomings and provide strategic guidance.
3. Protecting European Interests: In cases where European interests in strategic areas are involved, the Compartment may acquire a blocking minority or implement similar safeguards to protect these interests.

Potential Investment Scenarios:

1. No Immediate Co-Investor Interest: The Compartment may proceed with initial investments without immediate co-investor participation, focusing on de-risking the project and attracting future investors.
2. High Impact Innovations: Investments in companies with potential high societal impact or alignment with EU priorities, even if they face significant risks and challenges.
3. Strategic European Interests: Investments in companies essential to European strategic areas, requiring additional protective measures and targeted support.

By categorizing companies into Bucket 1, the EIC Fund can tailor its investment approach to manage high risks, support early-stage developments, and attract future private investments, thereby fostering innovation and protecting European strategic interests.

Bucket 2

Bucket 2 includes cases where potential investors, including Qualified Investors, show immediate interest in co-investing in EIC-selected companies. These companies are generally more developed and present lower risks compared to Bucket 1, making them more attractive to private investors.

Characteristics of Bucket 2 Companies:

1. Investor Readiness: These companies have achieved a level of development and risk mitigation that attracts immediate interest from potential investors.
2. Advanced Development Stage: Companies in Bucket 2 are typically beyond the initial proof-of-concept stage, with more established technologies or products.
3. Market Potential: They often have a clear market strategy, significant market potential, and demonstrated traction or early market entry.
4. Co-Investment Opportunities: There is a strong possibility for co-investment, leveraging additional funding from private investors.

Investment Approach for Bucket 2:

1. Equity Investment: The Compartment seeks equity investments, which are matched by private investors at least on a 1:1 basis, with an objective of achieving a leverage effect of 1:3 over the investment horizon.
   • Matching Investment: The EIC Fund requires that private investors cover at least 50% of the investment round, aiming for a higher leverage ratio throughout the investment cycle.
   • Alignment with Private Investors: Financial, commercial, and technology due diligence may be performed jointly with co-investors, ensuring alignment and optimizing investment terms.
2. Term Negotiations: The Compartment negotiates terms with potential co-investors, ensuring favorable conditions for both the company and investors.
3. Follow-On Support: The Compartment may reserve part of the initially awarded investment for potential top-up investment in subsequent funding rounds.

Strategic Measures for Bucket 2 Investments:

1. Mentoring and Support: The Compartment may require or facilitate mentoring and business support to ensure the company’s strategic growth and market success.
2. Blocking Minority Options: If required to protect European interests, the Compartment may acquire a blocking minority or secure similar guarantees through shareholder agreements.
3. Flexible Investment Structures: Investments may be structured flexibly to accommodate the needs of both the company and co-investors, enhancing the potential for successful market deployment and scale-up.

Potential Investment Scenarios:

1. Immediate Co-Investor Interest: Cases where potential investors show immediate willingness to provide the full investment, indicating strong market confidence in the company.
   • Leverage Effect: The Compartment aims for significant additional funding leverage, supporting the company’s growth and market entry.
2. Strategic Investments: Investments aligned with European strategic interests, where co-investment can enhance the impact and ensure the protection of these interests.
   • Safeguarding European Interests: Negotiations may include measures to safeguard European interests, such as acquiring a blocking minority or securing strategic agreements.
3. Market Entry and Scale-Up: Companies positioned for market entry and scale-up, where EIC support and co-investment can significantly accelerate growth.
   • Comprehensive Due Diligence: Detailed due diligence ensures that the company is well-positioned for successful investment and subsequent growth stages.

By categorizing companies into Bucket 2, the EIC Fund leverages immediate co-investor interest, facilitating significant additional funding and strategic support. This approach enhances the potential for successful innovation deployment, market entry, and scale-up, while protecting European strategic interests.

Bucket 3

Bucket 3 includes cases where potential investors show immediate interest in providing the full investment into EIC candidate companies, including the possibility of these companies being listed entities. These companies are typically well-developed, presenting low risk and high potential, making them highly attractive to private investors.

Characteristics of Bucket 3 Companies:

1. Mature Stage: These companies are at a mature stage of development with established products or technologies.
2. High Market Interest: They have demonstrated significant market traction and potential, attracting immediate and full investment interest from private investors.
3. Lower Risk: The risk associated with these companies is relatively low, given their advanced development stage and market validation.
4. Listed Entities: This category may also include publicly listed companies, broadening the investment scope.

Investment Approach for Bucket 3:

1. Direct Co-Investment: The External AIFM, upon recommendation from the Adviser, may decide to co-invest alongside private investors, especially to secure strategic interests.
   • Full Private Investment: In some cases, private investors may provide the entire investment needed, reducing the necessity for EIC Fund involvement.
   • Strategic Minority Stake: The Compartment might still co-invest to secure a blocking minority if needed to protect European interests.
2. Top-Up Investment: The Compartment may reserve part of the initially awarded investment for potential top-up investment in future funding rounds, ensuring continued support.
3. Aligned Investment Terms: Negotiations with private investors focus on ensuring favorable terms that attract private capital while safeguarding the company’s strategic direction and founders’ interests.

Strategic Measures for Bucket 3 Investments:

1. Ensuring Incentives: The Compartment seeks to ensure that founders and employees have sufficient incentives aligned with the company’s growth and success.
2. Investor-Friendly Terms: The terms negotiated aim to be investor-friendly, attracting significant private capital while avoiding market distortion.
3. Blocking Minority Acquisition: If required, the Compartment can acquire a blocking minority to protect European strategic interests, securing necessary safeguards through shareholder agreements.

Potential Investment Scenarios:

1. Full Private Funding: Cases where private investors are ready to provide the full investment, reflecting strong market confidence and reducing the need for EIC Fund involvement.
   • Strategic Co-Investment: Even with full private funding, the Compartment may co-invest to ensure strategic interests and align with European priorities.
2. Listed Companies: Investments in publicly listed companies, where the EIC Fund’s role may involve strategic participation rather than primary funding.
   • Market Alignment: Ensuring that investment terms and conditions align with market standards and investor expectations.
3. High Potential Ventures: Companies with clear potential for significant market impact and growth, where the EIC Fund’s strategic investment can enhance value.
   • Protecting European Interests: Ensuring that strategic measures are in place to protect European interests, particularly in critical sectors or technologies.

Investment Strategy and Execution:

1. Due Diligence and Risk Management: Comprehensive due diligence ensures the selection of high-potential, low-risk investments aligned with EIC Fund objectives.
2. Exit Strategy Planning: The Compartment plans for strategic exits, aligning with co-investors’ timelines and market conditions to maximize returns and impact.
3. Continued Monitoring and Support: Ongoing monitoring and strategic support ensure that investments continue to align with objectives and adapt to changing market dynamics.

By categorizing companies into Bucket 3, the EIC Fund leverages strong private investor interest, facilitating full or majority private funding while ensuring strategic participation and protection of European interests. This approach supports the deployment of mature innovations, market entry, and scale-up, enhancing the overall impact of EIC investments.

Annex 1. Definitions

The following words and expressions have specific meanings within the context of these guidelines:

• Adviser: The European Investment Bank (EIB) or its successor, acting as adviser.
• AIFM: An alternative investment fund manager within the meaning of the AIFM Directive and the AIFM Act 2013.
• EIC Fund Final Recipient: Any beneficiary selected by the EU Commission for funding under the EIC.
• Qualified Investor: An investor with demonstrable know-how and experience in the relevant market, technology, and jurisdiction.
• External AIFM: Alter Domus Management Company S.A. in its capacity as external AIFM of the Company.
• Business Day: A day on which banks are generally open for business in Luxembourg during the whole day (excluding Saturdays and Sundays and public holidays).
• Investment Committee: The investment committee of the External AIFM at the level of the External AIFM in charge of making all investments and divestment decisions.
• Non-Compliant Jurisdiction: Jurisdictions listed in various EU and international statements and regulations related to tax transparency and anti-money laundering.
• InvestEU: The InvestEU Programme established by Regulation (EU) 2021/523 of the European Parliament and of the Council of 24 March 2021.
• Horizon Europe: The Framework Programme for Research and Innovation established by Horizon Europe Regulation.
• EIC Accelerator: A programme within the Horizon Europe framework aimed at supporting high-risk, high-potential SMEs and startups.
• EISMEA: The European Innovation Council and SMEs Executive Agency, responsible for selecting and managing EIC Accelerator beneficiaries.

Annex 2. Exclusions

The Compartment does not invest in activities that are incompatible with the ethical and social basis of Horizon Europe, such as:

• Production or trade in illegal products
• Pornography or prostitution-related businesses
• Production or trade in hazardous materials
• Unsustainable fishing methods
• Businesses involved in forced or harmful child labor
• Political or religious content businesses
• Activities limiting individual rights and freedoms or violating human rights

About

The articles found on Rasph.com reflect the opinions of Rasph or its respective authors and in no way reflect opinions held by the European Commission (EC) or the European Innovation Council (EIC). The provided information aims to share perspectives that are valuable and can potentially inform applicants regarding grant funding schemes such as the EIC Accelerator, EIC Pathfinder, EIC Transition or related programs such as Innovate UK in the United Kingdom or the Small Business Innovation and Research grant (SBIR) in the United States.

The articles can also be a useful resource for other consultancies in the grant space as well as professional grant writers who are hired as freelancers or are part of a Small and Medium-sized Enterprise (SME). The EIC Accelerator is part of Horizon Europe (2021-2027) which has recently replaced the previous framework program Horizon 2020.

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