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 is the impact of COVID-19 on the day-to-day running of these start-ups? What is it doing to them?
“More than they had expected. Entrepreneurs are generally tenacious, headstrong, and have a positive attitude by nature. The first reaction was: Ah well, it will all blow over. At the beginning of the lockdown, I asked a start-up entrepreneur how things were going. His worst-case scenario was that they would lose a little bit of money. He was just starting to commercialize. Then we said: “If you take your worst-case scenario and see it as your best-case scenario, what does that impact look like then? And let’s talk again next week.” That’s how almost all conversations went. The corona crisis has had an enormous impact on almost every start-up. For the start-ups that are in the process of commercializing, 85% of the turnover that they thought they already had in their pockets vanished.”
Because everyone who hadn’t signed up yet postponed their orders?
“Yes, and start-ups that are going to commercialize hardly have any financial reserves, which puts them in trouble almost immediately. They tend to have relatively low profits and no other investors who will give them any extra money. The government’s initial reaction, such as postponing the payment of VAT, payroll tax, and the NOW scheme, is incredibly problematic for start-ups. How can you prove the impact that corona will have on your turnover if you are only going to make your first turnover this year? You can only do that if you also had revenue in the previous year. But that is often not the case with start-ups that are just starting to commercialize. They’re missing the boat. Now it is true that with the COL scheme (Dutch govt. bridge financing for start-ups, scale-ups, and SMEs, ed.) a solution has been found. But that applies to loans and the postponement of taxes and payroll taxes. These start-ups have been hit hard and they are not bankable.
Are there any start-ups that are less affected by COVID-19?
“Most of the start-ups that are still in a very early phase, that are still a long way from the market, and that had their funding in fairly good order before the corona crisis hit are virtually unaffected. Any financial commitments that investors had made with them usually remain intact. They just no longer enter into any new commitments.”
How many start-ups in your portfolio have failed?
“Two of our 27 start-ups in the Benelux are currently bankrupt and two are likely to fail within the next month.”
That’s about 15 percent. Do you think that’s a lot?
“No. It’s not that much. But there are people involved. The danger of statistics is that you think: ‘It’s not that bad.’ Except that it is bad. The average profile of an entrepreneur in the energy sector is of someone who is about 40 years of age with a family. People who left their jobs and the associated security behind because they were convinced of the merits of their technology. They are now failing because of an all-encompassing event in which the government says the doors are going to slam shut, which means they will lose their home and livelihood. If you are aware of that, it doesn’t matter how big or small that statistic is. Then it’s just terrible.”
Some entrepreneurs still have another job besides their start-up, don’t they?
“There are entrepreneurs who also have other businesses. That is true. They are not just dependent on their start-up. But there is also a start-up in our portfolio whose entrepreneur was working on technology for extracting energy from hydrogen. The investors he was bringing in have since dropped out. He didn’t have enough time to sort out his business plan. He already had other financial commitments. But that’s where it all goes wrong. He is currently going bankrupt.”
If you have to rate these problems for start-ups in the market, how serious are they?
“You might say that it’s not so bad. But if you add up what has been invested on a European level in technology from start-ups that are not yet fully developed, you could also say that the EU is writing off a few billion euros spent on start-ups that are now going bankrupt. Their technology will probably never see the light of day. We have spent all that money for nothing.”
Are you saying that the European Member States have to collectively write off a few billion euros, or does this amount only apply to start-ups in which the European Commission invested via EIT (including EIT InnoEnergy)?
“I think you have to see it as part of the bigger picture. This is not only an issue for energy-related start-ups. It concerns all start-ups. If you look at start-ups, they do constitute a large proportion of the workforce in Europe. The number of jobs varies per member state, but it accounts for several dozen percent of total employment. That’s a lot of money. The average start-up of an asset-heavy category entails between €250,000 and €750,000 of seed capital. That’s quite a substantial amount.”
This means that there is a destruction of capital when start-ups go bankrupt as a result of the corona crisis. Consequently, some unfinished innovative technologies are also lost. How bad is that for making the energy supply more sustainable?
“At the moment, I do not see any evidence that this crisis has led to our goals for a cleaner climate and a more sustainable future being parked somewhere. Instead, I see indications that our level of awareness is increasing. I am talking about the supply chain. There is criticism that our medical masks have to come from China and that they cannot be sewn together in the Netherlands. The positive impact of COVID-19 is also clearly apparent. It is very unfortunate that a good idea doesn’t see the light of day. Especially if you have invested in it. But that doesn’t mean that the world will come to an end. Imagine that it is possible to keep a significant proportion of those start-ups afloat. Suppose you give those businesses that are not bankable a bridge until the market normalizes a bit, then you don’t have to write them off. That would be so much better.”
Click this link for part 1 of this trilogy