The European Investment Bank identified a “fundamental market gap in innovation finance in Europe… back in 2016,” said Alessandro Izzo, head of the European Investment Bank equity, growth capital and project finance department. He explained that they looked first at the US experience in venture debt in Silicon Valley and adjusted the terms of the product to reflect “the firepower provided by the European Commission.”

What is a venture debt (VD)?

“It is a debt instrument which doesn’t absorb cash from the company by way of repayment of principal or interest,” Izzo said during an EIB conference in Kirchberg on 13 May 2024. He specified that the terms are generally five to seven years, a “feature that is not so much present in the market.” VD stands between equity and commercial debt in the capital stack of the company.

“We are very close to equity risk, and that is why the return is mainly provided by way of a second instrument, ancillary to the debt, which is a ,” stated Izzo. It responds to the need of high capital expenditure intensity for fast growing companies in the cleantech or biotech sectors, for instance. On the other hand, he suggested that companies near profitability, i.e., two to three years away, should seek more traditional funding.

Complementarity between the EU commission and the EIB

“The European Commission, in particular, the directorate-general for research and innovation [division] is financing research and innovation projects, said Anna Panagopoulou, director of European research area and innovation at the European Commission, DG RTD. She explained that the European Innovation Council “provides grants and equity at a very early stage of companies when the risk is very high to help them to develop a new product, scale up [to avoid] losing them to the United States.”

After de-risking the company, Panagopoulou explained that the next step is to envision the usage of venture debt, “a product co-designed and defined with the EIB.”

On the partnership with the EIB, Panagopoulou noted that the commission defines the political priorities--for instance, the portfolio of companies in AI, quantum, biotech, cleantech--whereas the EIB focuses on the due diligence. Izzo noted that the space sector is another sector with a high priority given EU’s need for “strategic independence and autonomy.”

Reaching out to private investors is key

According to Dana Burduja, head of the EIB’s life sciences and health division, it was expected, over the last 20 years, that EU member states would invest about 3% of their GDP in research and innovation. “The average is 2.2%.” She suggested that the missing part is the private investment on which the public can provide leverage.

Without giving advice to politicians, Izzo is very clear on how to reach out to European institutional investors. “The big change in the American venture capital scene [came with a] regulation for investment and insurance funds in the 50s and 60s, [which included] an obligation to invest a certain percentage in that asset class. That alone has ballooned the amount of money available for the sector.”

Technical and financial due diligence before getting your loan

“The entire department has hundreds of technical specialists from all backgrounds:  scientists, engineers, economists, mathematicians and medical doctors because we look in-depth into the technical structure of the projects,” said Burduja

She thinks that this expertise sets them apart from other investors as they “master the technologies.” However, Burduja admitted that “the technical due diligence lasts between nine and twelve months in life science, for instance. It is seen as cumbersome by some of our partners.” Yet she thinks this is a strength for the EIB as it enables a transfer of expertise from one project to another.  

Burduja also stressed that the EIB is the springboard between the policies of the European Commission and targeted sectors. The EIB ensures that innovative technologies are in line with the priorities of the commission while checking the scientific soundness and the commercial potential.

Among other technologies, she thinks that those promoting the clean energy transition, artificial intelligence and the digitalization revolution are “more prone to investments in the venture debt space.”

Practical case 1: scaling up energy transition firms

Claudio Spadacini, founder and CEO of Energy Dome Spa (ED), a long duration energy storage outfit, explained that his firm “makes renewables dispatchable so that we store solar power when it's available, and we release that electricity at night.” The same concept applies for wind energy. He noted that their technology comes from the oil and gas industry, which enabled them to “achieve a faster development.”

The company has built its first plant and has “become close to being commercial.” Spadacini commented at the EIB conference that his company is at a stage in which it must prove that the technology works, it is applicable to several business cases, and it is repeatable. Besides, the company needs to prove “the bankability of the technology.”

Through the issuance of a “blended finance instrument” supported by the EIB and a venture energy capitalist, ED managed to accelerate the deployment of a 20-megawatt plant proving the reliability of the technology to commercial banks but also the utilities which are very conservative clients.

Practical case 2: life science company looking for financial push before potential regulatory approval

Despite having access to the Danish stock exchange and modest revenues based on the licencing of partnership, Ravinder Chahil, senior vice president, general counsel at Zealand Pharma based in Copenhagen, explained that getting a “very large ticket” from the EIB enlarged its financial arsenal to support the development of two products in regulatory approval and “a number of other products in clinical development.” Beyond the financial investment, Chahil noted that others have noticed. “There must be something behind it.”

Izzo concurred by suggesting that the work done by EIB’s technology teams signal to the market “the leading rounds… where breakthrough and technological bets are taking place in Europe.” He added: “that will catalyse more private resources.”