EIT InnoEnergy in Eindhoven, the Netherlands, is a vehicle from the European Commission which invests money in start-ups that are developing innovative technologies in the field of sustainable energy. This autumn, Innovation Origins will publish a series of ten stories about how EIT InnoEnergy is aiming to drag the start-ups in its portfolio through the corona crisis. As a business creation officer at EIT InnoEnergy, Alexander Goos is in charge of this complex and sometimes even painful process. Together with a small team, Goos is responsible for all the investments InnoEnergy makes in the start-ups. Part 2 of a trilogy about investing in times of corona.
What solutions do you offer to start-ups that have run into problems?
“What we can do is limited. It is the entrepreneur themselves who has to do it. We can help with funding. We do this where it is worthwhile and where we can. Pretty soon after the lockdown, we started two lines of enquiry. In one, we looked at how we could increase our own liquid assets. Partly with new funding for a large part from the European Commission, as well as our own liquid assets. In the second case, we went through our portfolio with a fine-tooth comb. Never waste a good crisis.
Question 1 was: ‘What do the ventures need? Question 2 was: ‘Which ventures are worth trying to save, and which are not? That choice is really unpleasant, but that’s what it basically boils down to. During a number of sessions we looked at the state of affairs of the start-ups in our current portfolio: How much runway (money) do they have left? What is their burn rate and can this be lowered? Plus, we looked at the influence of corona on their business plan. And in any event, how long will this crisis last that the start-ups are currently going through? In most cases, we were assuming that we will be adversely affected by it up to and including September. That turned out to be fairly realistic.”
But the corona crisis might continue well beyond September?
“We are now just talking about the first impact of the COVID-19 outbreak is having on start-ups. Nobody is talking about the aftershock yet. We’re just trying to recover from the first shock and help each other through it.”
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How many of the start-ups will receive a financial injection after your survey?
“There are about 60 of them on a European level. In the first round, the level of urgency for these start-ups was considered the highest priority. The amounts they receive vary from €50,000 to €1 million, and anything and everything in between. A second round will take place in July, when we will also take look at the start-ups which we disignated as having second priority. There are about thirty of those. After that, there will be a third round. At the end of each round, we look at how much we have invested, how much money we have left in our wallet, and how many companies we can help in the next stage.
So, it is almost always a matter of financial support. What would have happened to those start-ups if you hadn’t provided that support?
“In some cases, that would certainly have meant bankruptcy. In other cases, they would have had to make concessions regarding their business operations and product development. That would have significantly reduced their chances of success.”
How did you determine which companies should receive a financial injection first?
“We are working on our portfolio day and night and we know the start-ups extremely well. So, we can properly assess the market potential of these companies. We know what we can expect from most of them in the future. We’ve made a selection on that basis.”
Are the companies that received first priority support the best start-ups in your portfolio, or are they the start-ups that needed the money most urgently?
“It is a combination of companies that we have the highest expectations of and companies that really need money very badly otherwise they will collapse. The second and third tranche also includes companies that we are expecting a lot from. There are also companies in our portfolio that are in such good shape that they don’t need any help.”
How do you view the future?
“I don’t think we’ve even begun to see the blow that is about to hit.”
What do you mean by that?
“I don’t think there’s ever been a time in the history of Western civilization when governments have said, ‘the door is slamming shut.’ That’s a risk that you and I did not consider realistic until recently. I have worked in developing countries for many years. Over there it is quite normal to deal with governments that open and shut the doors whenever it suits them. This is not inherent to Western society.
It is a fact that these kinds of things are now becoming part of our society. It may also be the case that the government says in this case: I don’t care what your name is and who you are, but your door is being shut down. That will have an impact on the way we treat each other, on our investment climate and how open-minded we are about the future. The repercussions of all of this are still to come. Everyone is now doing what is expected of them. We keep our distance. We put on a face mask. The children go to school part-time.
Very few people have kicked up a fuss. Most people are still at the stage: ‘Corona isn’t affecting me, I’m young and healthy.’ Or they are at a stage in which they are slightly afraid of this virus. You can barely see the impact on the economy. There have been hardly any redundancies. Everything is being kept afloat. We are working on that too. But it will be over and done with by next year.”
Why will that be all over next year?
“Many government support schemes revolve around deferral of payments. They have to catch up with them at some point. Sooner or later, the reserves of the largest companies will also dwindle. Then more redundancies will follow. Plenty of investments don’t come to fruition simply because the market is no longer there. Europe is now looking for a solution in low-cost funds by keeping interest rates low. But that doesn’t serve the market very well.
I expect that the economic climate will take a major hit. At the same time, I think the climate for start-ups is bound to change. The age of 25 years of outsourcing is coming to an end. I think we’re going to move towards a supply chain of no more than 2,000 kilometers. I think we’re switching – albeit automated – to production within Europe. I think we are moving towards a more homogeneous European market and I hope that the walls around Europe will be lifted. I think we are shifting away from the idea that a start-up should grow as quickly as possible and that we look for start-ups with a lower risk profile. That is more in keeping with the European mentality. I expect plenty of innovations on the horizon: Hardship and crisis are always a very fertile breeding ground.”
You don’t believe that a vaccine will be found?
“I think that the virus makes it clear that the system cannot cope with such a huge demand for healthcare. The economy is locked down as a result. I’m worried about the impact of that lockdown. The tsunami of economic malaise hasn’t really kicked in yet. Unemployment rates in the US are now close to those of the 1930s. The reaction to the crisis is much slower in Europe because our economy is more socially oriented. Dismissal is more difficult and caring for each other is important. You can see that blow much quicker in the US.”
But that blow is also going to come down on Europe?
“I suspect that it will.”
Do you think this crisis will lead to another kind of investment profile in Europe?
“Yes, the American investment model does not suit our economy particularly well. The model we all use is: I put in 1 euro and get 10 euros out of that in five years’ time. Why? Because I aggressively value you looking towards the future. If the mindset of the party taking over my shares is the same, that line of thought will work on through. But it actually doesn’t work that way in practice. In Europe, our approach has a far more of an engineering angle. Things have to be just right. We look at the balance sheet value and asset value. In Europe, we are very good at getting companies off the ground in a very solid way.”
What do you mean by that?
“Germany is a great example. Medium-sized companies with an annual turnover of more than one billion euros have often been around for generations already. These companies are deeply rooted in their countries and regions. They are part of the whole chain in terms of added value. They are less familiar with this in the Anglo-Saxon investment model. This is soemthing that we are good at in Europe. But that’s not how we actually invest venture capital. I expect that we are going in that direction now. We will focus less on aggressive short-term growth and more on long-term relationships between start-ups and their local stakeholders.”
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