Catalyst or Co-Traveler? An Assessment of the EIC Fund's Efficacy in Bridging Europe's Deep-Tech Valley of Death

Section 1: The European Mandate: Defining the Deep-Tech 'Valley of Death' and the EIC's Stated Ambition

The European Union's economic landscape is characterized by a persistent paradox: it is a world leader in scientific research and early-stage innovation, yet it consistently lags behind global competitors, particularly the United States, in translating these breakthroughs into market-dominant, scaled-up companies. This structural deficiency, often termed the "deep-tech valley of death," represents a critical market failure where promising ventures perish not from a lack of technological merit, but from a lack of capital. In response, the European Commission established the European Innovation Council (EIC) and its investment arm, the EIC Fund, as a flagship initiative under the Horizon Europe programme. With a multi-billion euro mandate, the EIC has been positioned as a strategic, patient, and catalytic investor, designed explicitly to correct this market failure. This section defines the scale of the financing gap the EIC aims to bridge and articulates its official, ambitious mandate, establishing the normative framework against which its operational model and ultimate efficacy will be assessed.

1.1 Quantifying the Chasm: Europe's Structural Scale-Up Financing Gap

The "valley of death" is not a theoretical concept but a quantifiable chasm in the European funding continuum. It describes the perilous phase in a company's lifecycle after initial research grants are exhausted but before the technology is de-risked enough to attract significant private venture capital (VC).¹ This gap is particularly deep and wide for "deep-tech" companies—those built on tangible scientific and engineering breakthroughs—which are inherently capital-intensive and carry long, uncertain timelines to commercialization.²

The disparity between the EU and its primary competitor, the United States, is stark. From 2016 to 2020, U.S. venture capital investment was consistently four to five times higher than that in the EU.⁴ This chasm is most pronounced in the later, larger funding stages crucial for scaling. The U.S. boasts twelve to fourteen times more VC funds with over $500 million in assets under management—the very funds capable of writing the large cheques that turn promising scale-ups into global leaders.³ Consequently, while Europe has a thriving startup ecosystem, its innovative companies face severe challenges in accessing the growth capital required to scale within the continent.⁵

This funding bottleneck has predictable and damaging consequences. Many of Europe's most promising deep-tech firms are forced to relocate to the U.S. or sell to foreign buyers to access the necessary capital, leading to a significant drain of innovation, talent, and economic value.³ This is not a failure of European innovation itself, but a systemic failure of its financing ecosystem to nurture its own creations through their most vulnerable growth phases. The EIC was conceived as the EU's strategic intervention to remedy this very problem.

1.2 The EIC's Call to Arms: A Mandate of a Strategic, Patient, and Catalytic Investor

The European Innovation Council, with a total budget of over €10 billion for the 2021-2027 period, was launched as a direct and ambitious response to this challenge.⁷ Its investment vehicle, the EIC Fund, is endowed with over €3 billion for the same period, positioning it to be one of Europe's largest deep-tech venture capitalists.⁴ The Fund's official mandate is to operate as the venture arm of the European Commission, with the explicit purpose of bridging the funding gap for high-risk, breakthrough technologies.¹⁰

The language used to define its role is intentionally bold and market-correcting. The EIC Fund describes itself as a "strategic risk-taker" ¹⁰ and a provider of "patient capital," signaling a long-term investment horizon of 7 to 15 years.⁴ This approach is designed to contrast sharply with the perceived short-termism of some private VCs, who may be hesitant to back science-based companies that require five to ten years just to bring a product to market.² The EIC's mission is to finance the projects that private investors deem "too risky" ¹², thereby de-risking them to a stage where they can attract subsequent private funding.

Central to this mission is the strategic principle of "crowding in" private capital. The EIC's stated ambition is to leverage its own budget to catalyze an additional €30 to €50 billion in private investment.⁴ This concept is foundational to the EIC's design and the primary point of contention in assessing its effectiveness. The term "crowding in" can be interpreted in two distinct ways. The first, more catalytic interpretation, suggests that the EIC invests first, acting as a lead risk-taker to de-risk a venture to the point that private investors follow into a deal they would have otherwise ignored. The second, more supplementary interpretation, suggests the EIC invests alongside private investors in deals they already find attractive, adding public money to a round that was already viable. The degree to which the EIC's operational model facilitates the former versus the latter is the central question of this analysis.

1.3 The EIC Ecosystem: A Multi-Instrument Approach to Innovation

To address the full innovation lifecycle, the EIC deploys a suite of funding instruments. The EIC Pathfinder supports early-stage, high-risk research projects (Technology Readiness Level, or TRL, 1-4). The EIC Transition instrument aims to mature and validate technologies emerging from Pathfinder projects or other research, preparing them for commercial application. Finally, the EIC Accelerator is the main vehicle for funding the development and scale-up of individual SMEs and startups (TRL 6-8), offering a unique "blended finance" model that combines non-dilutive grants of up to €2.5 million with equity investments of up to €15 million via the EIC Fund.⁴

Recognizing the scale of the funding gap, the EU has more recently introduced two larger-scale instruments. The EIC STEP Scale-Up programme operates within the EIC Fund to provide larger equity injections (€10-€30 million) for strategically important technologies. Entirely separate is the new Scaleup Europe Fund, a multi-billion euro, privately-managed fund-of-funds designed to participate in late-stage funding rounds exceeding €100 million.⁵ These instruments, with their distinct mandates and governance structures, represent an evolving European strategy for tackling the financing challenge at different scales.

Section 2: The Co-Investment Doctrine: A Mechanical Analysis of the EIC Accelerator's Investment Model

While the EIC Fund's mandate is articulated in the ambitious language of market creation and strategic risk-taking, its operational reality is dictated by a detailed and complex set of procedures. An analysis of these mechanics, from the initial application to the final investment decision, reveals a structure that systematically prioritizes co-investment with the private market. This section deconstructs the EIC Accelerator's investment process, focusing on the pivotal role of the co-investor and the "bucket" system that codifies the Fund's relationship with the private VC ecosystem. This procedural analysis provides the core evidence needed to evaluate claims that the Fund has become a risk-averse follower rather than a bold leader.

2.1 The Funnel: From Application to Investment Decision

The path to securing EIC funding is a rigorous, multi-stage gauntlet designed to filter for excellence, impact, and market potential. The process begins with a short proposal, including a summary, a pitch deck, and a video pitch, which is evaluated remotely. Successful applicants are then invited to prepare a full, detailed business plan for submission at specific cut-off dates. Those who pass this second remote evaluation are invited to a final face-to-face interview with a jury composed of independent investors, seasoned entrepreneurs, and other external experts.¹⁴

This selection process is, in itself, a powerful de-risking and market-validation mechanism. The jury members, drawn from the private sector, naturally apply market-based heuristics and pattern recognition in their evaluations. Consequently, companies that are "selected" for EIC support have already passed a significant market-oriented filter and received a stamp of approval from the very community they will later need to attract for co-investment.

The governance structure that oversees this process is notably complex. It involves the European Commission as the ultimate shareholder, which selects the companies for support; the European Innovation and SME Executive Agency (EISMEA), which manages the grant component; the European Investment Bank (EIB), which acts as an investment advisor and conducts due diligence; and an external, private Fund Manager (such as AlterDomus) who is responsible for making the final investment decisions and managing the portfolio.⁷ This multi-layered structure, while intended to ensure accountability, has been a significant source of operational friction, leading to the very delays and bureaucratic burdens that have drawn criticism from the founder community.⁹

2.2 The 'Bucket' System: Codifying the Co-Investment Requirement

Once a company is selected by the jury, it is not guaranteed an investment. Instead, it is channeled to the EIC Fund for an initial assessment, after which it is categorized into one of four investment scenarios, or "buckets." This system is the critical mechanism that defines the Fund's operational posture and is central to understanding its risk appetite.¹

• Bucket 2: Co-investment opportunities. This is presented as the default and preferred scenario. It is for companies that have already attracted immediate interest from private co-investors. In these cases, the EIC Fund's investment must be at least matched on a 1:1 basis by these other investors. Crucially, the Fund's guidelines state that it will "generally rely on financial, commercial, and technology due-diligence performed by them [the co-investors] and generally seek to align to their terms".¹ This explicitly positions the EIC Fund as a follower, not a leader, piggybacking on the validation and diligence of the private market.
• Bucket 3: Alternate investment opportunities. This bucket is for companies so attractive that private investors are willing to provide the full investment required. Here, the EIC Fund may choose not to invest at all, ceding the opportunity entirely to the market. Its participation is limited to cases where it may co-invest a smaller amount to secure specific strategic EU interests, such as acquiring a blocking minority to prevent foreign control.²⁴ This further underscores the Fund's deference to private capital.
• Bucket 1: Low maturity and failure to attract co-investment. This is the scenario that, in theory, addresses the true "valley of death"—companies that are technologically promising but have not yet managed to attract private investors. The process for these companies is revealing. The EIC Fund may invest an initial tranche alone, often structured as a convertible note to provide immediate runway.²⁴ However, the disbursement of the second, larger tranche of equity is explicitly conditional on the company successfully finding a qualified external lead investor who will invest an amount at least equivalent to the remaining EIC commitment.¹ This means that even for the highest-risk companies it selects, the EIC Fund's full support is ultimately contingent on securing private market validation.
• Bucket 0: No Go. This category is for companies where the EIB's due diligence uncovers substantial negative issues, such as compliance failures, misrepresentation, or other critical red flags, leading to a rejection of the investment component.²⁴

This "bucket" system codifies a clear hierarchy of preference, with market-validated companies in Bucket 2 receiving the most streamlined path to investment, while the highest-risk companies in Bucket 1 face the additional hurdle of securing a lead investor to unlock their full funding. Furthermore, the EIC Fund's practice of adopting the valuation set by the private co-investor in Bucket 2 scenarios is a powerful admission of its role.²⁹ A lead investor's primary functions are to conduct deep diligence and set the terms of a round, including valuation. By outsourcing these functions, the EIC confirms it is not acting as a price-setter or market-maker, but as a price-taker and co-investor who follows the market's lead.

2.3 The Solo Investment Exception: A Strategic Imperative or a Procedural Rarity?

The official guidelines do allow for a crucial exception. The EIC Fund Board may decide, on an "exceptional basis," to proceed with a full investment in a Bucket 1 company without an external lead investor.¹ This provision is reserved for companies operating in an "essential area of EU interest," addressing a critical societal need, or developing strategic technologies where the Commission deems it necessary to acquire a blocking minority to safeguard EU interests.²⁴

While this carve-out for solo investment exists on paper, the entire architecture of the EIC Fund—from its co-investment-centric KPIs to the operational flow of the bucket system—is designed to steer companies towards finding a private partner. Internal debates within the European Commission have reportedly pushed the EIC Accelerator towards making equity investments conditional on matching financing, suggesting that the solo investment path is not the preferred operational mode.²⁵ This structure creates significant uncertainty for founders of high-risk ventures. A company that receives an initial convertible note from the EIC Fund (the Bucket 1 scenario) finds itself in a precarious position. It has a public, bureaucratic entity on its capitalization table, which can be a red flag for private VCs due to concerns about slow decision-making and non-commercial objectives.⁹ This can complicate, rather than facilitate, the subsequent fundraising process. The very instrument designed to bridge the valley of death could, in some cases, inadvertently make it more difficult to cross by creating what some in the venture community have termed a problematic cap table.²

Section 3: Performance Under Scrutiny: An Empirical Evaluation of the EIC Fund's Portfolio and Impact

The EIC regularly publishes impact reports highlighting its significant achievements in supporting European deep-tech. These reports present impressive headline figures regarding co-investment leverage, portfolio company valuations, and growth metrics. However, a critical analysis of this data, viewed through the lens of the Fund's co-investment-driven mechanics, is necessary to determine whether these outcomes are a result of the EIC acting as a catalyst for innovation or a reflection of its success in selecting already-promising ventures. This section scrutinizes the EIC Fund's performance data to assess whether it supports the thesis of a market-creating leader or a market-following co-traveler.

3.1 The Leverage Metric: A Sign of Catalysis or Confirmation Bias?

The EIC's most frequently cited performance metric is its co-investment leverage ratio. The Fund reports that for every euro it invests directly, it mobilizes over €3.0 to €3.5 in additional investment, primarily from private sources.⁸ The EIC presents this as clear evidence of its success in "crowding in" private capital and fulfilling its catalytic mission.

However, this interpretation warrants closer examination. Given that the Fund's operational model is heavily skewed towards co-investment—with Blended Finance options, where co-investment is the norm, accounting for 83-84% of the total allocated budget—a high leverage ratio is an almost inevitable outcome of its design.¹³ When the EIC invests as a minority participant in a larger round led by private VCs (the Bucket 2 scenario), its contribution will naturally be multiplied by the capital from other investors. Therefore, the high leverage ratio may not primarily represent the EIC causing investment that would not have otherwise occurred; rather, it may reflect the EIC joining funding rounds that were already materializing, thereby selecting for companies capable of attracting significant private capital on their own.

The very KPIs used to measure the EIC's success may create a self-reinforcing loop of risk aversion. An institutional imperative to maximize the co-investment leverage ratio incentivizes the Fund's managers to prioritize investments in companies that can attract the largest possible private funding rounds. These are, by definition, the most commercially attractive and least risky ventures. This creates a feedback cycle where the official measure of success drives behavior that runs counter to the core mission of funding the highest-risk companies languishing in the valley of death.

3.2 Portfolio Analysis: Investing in Winners or Creating Them?

The quality of the EIC's portfolio is undeniably high. It includes over 150 "centaurs" (companies with valuations exceeding €100 million) and at least 8 "unicorns" (valuations over €1 billion).⁸ Furthermore, EIC-backed companies demonstrate impressive growth, with an average 50% increase in both employment and turnover within the first two years of receiving support.³¹

The critical question is one of causality: does this data prove the EIC's value-add in creating these winners, or does it primarily reflect a strong selection effect? The EIC Accelerator's application process is intensely competitive, with an overall success rate of only 7% from the full proposal stage to final selection.¹³ This rigorous funnel ensures that only the most elite, well-prepared, and validated deep-tech companies in Europe are chosen. These are precisely the companies that private VCs are also seeking. The subsequent growth and high valuations of these portfolio companies may have been achieved regardless of the EIC's involvement, with its contribution being supplementary rather than essential. The data suggests a preference for more mature startups and early-stage scale-ups over nascent spin-offs, further supporting the idea that the Fund targets companies already on a strong growth trajectory.¹³

The portfolio's distribution reinforces this pattern. Geographically, investments are concentrated in countries with mature and well-established deep-tech ecosystems, such as France and Germany, which consistently rank as the top recipients of EIC funding.³⁴ Sectorally, the focus is on high-potential areas like Life Sciences, Advanced Manufacturing, and Energy, which are also attractive to private capital.¹³ While this strategy ensures a high-quality portfolio, it does less to address the funding gaps in less-developed innovation ecosystems or more nascent technological fields.

3.3 The Founder's Gauntlet: Success Rates and Operational Drag

Beyond the numbers, the qualitative experience of founders reveals significant operational challenges. Despite the EIC's mandate to be a flexible and supportive partner, companies selected for investment have reported extensive delays, with waiting times often exceeding a year between selection and the actual disbursement of funds.⁹ These delays, attributed to the Fund's bureaucratic complexity and initial lack of capacity to manage a large equity portfolio, have put many startups in precarious financial positions, at risk of collapse while waiting for the promised capital.⁹ Surveys of beneficiaries have highlighted the duration of the investment process and a lack of communication and transparency as key challenges.⁹ This operational drag represents a significant hidden cost and a major drawback compared to the nimbleness of private VC funds, potentially deterring the very companies the EIC aims to support.

Section 4: Reinforcing the Model: The EIC STEP Scale-Up and the Pre-Commitment Prerequisite

The evolution of the EIC Fund's strategy, particularly with the introduction of the EIC Strategic Technologies for Europe Platform (STEP) Scale-Up programme, provides further insight into its operational philosophy. Designed to address the need for larger investment tickets in strategic sectors, the STEP programme, rather than empowering the EIC to take bigger and bolder autonomous risks, has further entrenched its dependency on private market validation. It transforms the goal of finding a co-investor into a non-negotiable prerequisite for consideration, marking a significant strategic shift towards a more conservative, market-following posture.

4.1 Upping the Ante: The EIC STEP Scale-Up Mandate

The EIC STEP Scale-Up programme was created to address a specific segment of the funding gap: the need for larger capital injections for companies in critical technology areas deemed vital for Europe's strategic autonomy.¹⁹ It offers larger, equity-only investments ranging from €10 million to €30 million, a significant increase from the standard EIC Accelerator cap.¹⁰ The explicit goal of these larger investments is to act as a catalyst for major funding rounds, typically in the range of €50 million to €150 million, thereby helping promising European companies achieve the scale necessary to compete globally.¹⁹ The programme targets key sectors such as digital technologies, deep-tech, biotech, and cleantech, aiming to reduce the EU's strategic dependencies on foreign technology.¹⁹

4.2 The Pre-Commitment Rule: From Co-Investment Goal to Entry Requirement

The most telling feature of the STEP Scale-Up programme is its core eligibility criterion. To apply, a company must already have a "pre-commitment from a qualified lead investor, representing at least 20% of the total target funding round".¹⁹ This rule represents a fundamental departure from the EIC Accelerator's model. While the Accelerator's "bucket system" aims to find or encourage co-investment after a company has been selected, the STEP programme makes private investor validation a mandatory entry ticket. The market signal is no longer a desired outcome of the process but a prerequisite to begin it.

This mechanism directly substantiates the critique that the EIC Fund is unwilling to invest in companies that cannot secure private capital on their own. For its largest investment tickets, the Fund has codified a process that ensures it only engages with companies that have already been de-risked and validated by a private lead investor. This structure effectively means the STEP programme is not designed to initiate funding rounds for companies struggling in the valley of death. Instead, it functions as a "round amplifier" or a public co-General Partner (Co-GP), providing additional capital to funding rounds that are already being formed and led by the private sector.

This evolution indicates a strategic retreat from the riskiest segment of the market. The original, high-risk mandate of the EIC Accelerator was to fund the "unfundable." The STEP programme, by its very design, targets companies that have already proven themselves to be "fundable" by securing a lead investor. While addressing the insufficient size of European scale-up rounds is a valid and important policy objective, it is a different and less risky mission than the one for which the EIC was initially conceived. The EIC's role, as its cheque size increases, appears to be shifting from that of a potential pioneer to an obligatory follower, functioning more like a large institutional co-investor than a trailblazing public venture fund.

Section 5: Bridging a Different Chasm: The Scaleup Europe Fund's Role in Late-Stage Financing

The European Union's strategy to address its innovation funding gap extends beyond the EIC's direct mechanisms. The recent initiative to establish the Scaleup Europe Fund represents a significant and distinct pillar in this strategy. By creating a separate, privately-managed vehicle to tackle the very late-stage funding chasm, the EU is implicitly acknowledging the operational scope and limitations of the EIC Fund. This move highlights a strategic bifurcation, delegating the largest, most market-driven investments to a structure governed by private sector principles, which in turn helps to clarify the EIC's intended, albeit not always realized, role in the earlier, higher-risk stages of the ecosystem.

5.1 A New Vehicle for a Larger Gap

The Scaleup Europe Fund is designed with a clear and separate mission: to provide direct equity for major, European-led funding rounds in the range of €100 million and above.⁵ Its purpose is to address the critical late-stage scale-up gap that forces mature, high-growth European companies to seek capital outside the EU, often resulting in their relocation or acquisition by foreign entities.³

This mandate positions it at a much later stage than the EIC Fund. While the EIC STEP programme's maximum investment is €30 million, the Scaleup Europe Fund's involvement begins with rounds of €100 million. This clear demarcation indicates that it is not an extension of the EIC but a complementary instrument targeting a different market failure: the lack of domestic mega-funds in Europe capable of financing the final push to global market leadership.

5.2 A Public-Private Partnership in Governance

The governance model of the Scaleup Europe Fund is fundamentally different from that of the EIC Fund and is a key indicator of its intended operational philosophy. The fund is designed to be "managed by a private, world-class management company, ensuring independent and market-based decision-making".⁵ The European Commission's role is that of a founding investor, participating on equal terms alongside a consortium of major private and institutional investors, such as Novo Holdings, the Wallenberg family's foundation, and CriteriaCaixa.⁶

This structure contrasts sharply with the EIC Fund, which is wholly owned by the European Commission and managed through a complex, multi-layered public-private apparatus involving the EIB and an external fund manager operating under strict guidelines.¹⁰ The decision to place the Scaleup Europe Fund under private management suggests a strategic choice to prioritize market discipline, speed, and commercial acumen for late-stage investments, implicitly recognizing that a public-sector-led model may not be optimal for the pace and scale required in global growth equity. This bifurcation of approaches may reflect a policy learning process, acknowledging that the hands-on, bureaucratic structure of the EIC is ill-suited for the demands of the late-stage market, lending credibility to the critiques of the EIC's own operational drag.

While this two-pronged strategy appears logical, it also risks creating a fragmented policy landscape. A potential "gap between the gaps" could emerge, where a company graduating from the EIC STEP programme may not yet be large enough or fit the specific investment thesis of the Scaleup Europe Fund's private managers. The transition from one funding vehicle to the other is not seamless; a successful EIC-backed company must begin a new fundraising process with a completely different set of actors and criteria. This potential discontinuity challenges the vision of a cohesive, full-lifecycle European funding pipeline, highlighting the ongoing difficulty of creating a truly integrated system of patient capital.

Section 6: A Critical Synthesis and Strategic Recommendations: An Exercise in Hubris?

The European Innovation Council was born from a grand and necessary ambition: to decisively intervene in the European deep-tech ecosystem and solve the persistent market failure that stifles the growth of its most promising ventures. The charge of "hubris" leveled against it stems not from the nobility of this goal, but from a perceived and widening chasm between its catalytic rhetoric and its cautious, market-following reality. This final section synthesizes the preceding analysis to render a verdict on this critique and evaluates a proposed alternative model that could better align the EIC Fund's mechanism with its mission.

6.1 Verdict: Reconciling an Ambitious Mandate with a Cautious Mechanism

The evidence presented throughout this report leads to a nuanced conclusion. The EIC Fund was unequivocally founded to tackle a well-documented market failure, armed with a mandate to act as a strategic, patient, and risk-tolerant investor. It has succeeded in building a high-quality portfolio of innovative European companies and has mobilized significant private capital.

However, its core operational mechanics reveal a deep-seated and increasing dependency on private market signals. The "bucket" system, the reliance on market-oriented juries, the adoption of private-market valuations, and the evolution towards a pre-commitment requirement for larger investments under the STEP programme all point to a model that prioritizes co-investment over catalytic, first-mover risk-taking. The Fund's primary success metric—the co-investment leverage ratio—is more an artifact of this market-following design than a definitive measure of market creation.

Therefore, the central critique holds significant weight. While the EIC is an important source of funding, its current model does not, by and large, solve the most difficult part of the problem it was designed for: providing scale-up capital to high-potential companies that cannot yet attract a lead private investor. It has become more adept at identifying and supplementing winners that the market has already begun to validate, rather than creating winners out of the high-risk, unvalidated ventures languishing in the true valley of death. In this respect, the "hubris" lies in the profound mismatch between the grandiosity of the stated mission—to fund what others will not—and the inherent risk-aversion of the chosen methodology, which demands that others invest alongside it. The EIC Fund, in its current incarnation, is more of a strategic co-traveler than a bold catalyst.

6.2 Evaluating the Alternative: A Solo-Investor Model with Co-Investment Incentives

An alternative model has been proposed: the EIC Fund should act as a true lead investor, committing to the full investment amount required by a company after conducting its own rigorous due diligence. Having taken this primary risk, it would then actively incentivize private co-investment by offering a discount (for example, on the valuation or through warrants) to other investors who wish to participate in the round.

This model presents clear potential advantages:

• True Catalysis: It would force the EIC to operate as a genuine lead investor, taking on the primary risk and making a definitive commitment. This would directly serve companies in the deepest part of the valley of death, those without any existing private market validation.
• Active Incentivization: Offering a concrete financial incentive is a powerful, market-based mechanism to "crowd in" private capital. It would transform the EIC's role from a passive validator to an active market-maker, rewarding private investors for following its lead and trusting its diligence. This aligns with academic research on the positive signaling and certification effects of public VC investment.⁴⁰

However, this approach also carries significant challenges and risks:

• The "Picking Winners" Problem: This model places the full burden of investment selection and valuation on a public entity, reviving the classic public policy concern that governments are inherently poor capital allocators compared to the market.⁴² The EIC's current model effectively outsources a significant portion of this risk to the private sector.
• Expertise and Capacity: The EIC has already faced severe criticism for its lack of capacity and expertise to manage its current portfolio, leading to damaging delays.⁹ Acting as a lead investor on hundreds of deep-tech deals would necessitate a massive expansion of specialized internal talent, transforming the EIC Fund into a full-fledged, state-owned VC firm—a structure the EU has been hesitant to create.
• Incentive Misalignment: Public fund managers are often driven by different incentives than their private counterparts, such as political objectives, regional distribution, or job creation, which can lead to sub-optimal investment decisions, longer holding periods, and potentially lower financial returns.⁴⁰

6.3 Strategic Recommendations for a More Catalytic EIC

A complete overhaul of the EIC Fund may be unfeasible, but a strategic rebalancing of its approach is both necessary and achievable. The goal should be to create a hybrid model that retains the efficiency of its co-investment track for market-ready companies while building a genuinely catalytic track for high-risk ventures.

Recommendation 1: Formalize and Empower the Solo-Investment Path.

The EIC Fund should reform its "Bucket 1" process to make solo investment a primary, respected tool rather than a rare "exception." A significant, dedicated portion of the Fund's annual capital should be explicitly allocated to a portfolio of companies where the EIC acts as the sole lead investor. This would create a clear and viable path for companies that cannot secure immediate private co-investment, directly addressing the core of the valley of death problem.

Recommendation 2: Pilot an Active Incentive Mechanism.

The EIC should pilot the proposed incentive model on a controlled scale. For a select portfolio of its solo-led investments, the EIC Fund could offer standardized, pre-defined discounted terms to members of its Trusted Investors Network ¹⁰ to syndicate the round after the EIC has fully committed. This would test the efficacy of using financial incentives to crowd in private capital, providing valuable data for future policy design.

Recommendation 3: Redefine and Diversify Success Metrics.

The primary KPI for the EIC Fund must evolve beyond the simple co-investment leverage ratio, which, as shown, can incentivize risk-averse behavior. New metrics should be introduced to better reflect the Fund's unique public policy mission. These could include:

• "Number and value of investments made in companies without a prior lead investor."
• "Rate of subsequent private funding raised by companies that received initial solo investment from the EIC."
• "Time-to-capital for Bucket 1 companies versus Bucket 2 companies."

By adopting a more nuanced set of KPIs, the European Commission can realign the EIC Fund's internal incentives with its foundational public purpose: to be the bold, strategic, and catalytic investor that Europe's deep-tech innovators desperately need.

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