Posted on 07/Apr/2016
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Two years ago the European Commission launched the SME Instrument to address a notorious funding gap in small early-stage companies that is a major barrier to innovation. Here’s the key steps your start-ups should follow to enjoy this funding opportunity.


The European Commission has fully recognised the key role of ICT in improving the business landscape in Europe and many efforts are being made to foster digital entrepreneurship.

Firmly embedded in Europe 2020 – the European Union’s ten-year growth strategy – the Digital Single Market strategy (formerly known as Digital Agenda) recognises the revolutionary potential that information and communication technology (ICT) offers to boost growth, increase productivity and improve the welfare of citizens and consumers.

The Digital Agenda has set goals with 101 actions, spread over 7 pillars, which will help to reboot the EU economy and enable Europe’s citizens and businesses to get the most out of digital technologies. ‘Pillar V: Research and innovation’ hopes to attract Europe’s best minds to research, acknowledging that world class infrastructures and adequate funding are crucial.

From an economic perspective, the importance of SMEs for economic growth and jobs creation is increasingly obvious: Start-ups create the majority of new jobs. However, Europe is clearly lagging behind other geographical areas in terms of global leadership in this sector.

Therefore, EU level action is essential, as a complement to existing initiatives at local, or national level. The issues identified, such as the need for a stronger culture of entrepreneurship and innovation, or insufficient access to financial resources and human capital, extend well beyond the borders of individual EU member states.

In an effort to maintain Europe’s competitive edge through increased coordination and its attempt to go beyond national fragmented efforts, the European Commission has taken action to help entrepreneurs and SMEs fully exploit the potential of technologies, both in terms of supply of new digital products and services and in terms of demand and smart use of these technologies.

In this spirit, Start-up Europe and the Entrepreneurship 2020 Action Plan were designed to unleash Europe’s entrepreneurial potential, to remove existing obstacles and to foster the culture of entrepreneurship in Europe.


The challenges ahead

Yet, efforts to remove obstacles alone are not enough; turning research/science based innovation into new services and products is a challenging endeavour, as commercialising new forms of innovations is inherently high-risk and requires significant investments and follow-up funding.

It is worth noting that private investments in ICT research in Europe continue to lagging behind (less than half of investments compared with the US).

As such, the EU is currently losing the race on scaling-up disruptive, market-creating innovation with the US leading the pack (101 Unicorns) and China following (36 Unicorns). By contrast, the EU only counts 19 Unicorns.[1]

The lack of sufficient public information for potential investors about technologies developed by small firms or the leakage of new knowledge that escapes the boundaries of firms and intellectual property protection, are amongst the many different challenges young entrepreneurs face.

The challenges of incomplete and leaky information pose substantial obstacles for new firms seeking capital. The difficulty of attracting investors to support an imperfectly understood, as yet-to-be-developed innovation is especially daunting.

Screen Shot 2016-04-06 at 22.23.41

Indeed, the term, “Valley of Death”, has come to describe this challenging transition when a developing technology is deemed promising, but too new to validate its commercial potential and thereby to attract the capital necessary for its development.

Lacking the capital to develop an idea sufficiently to attract investors, many promising ideas and firms perish.

Despite these challenges, many firms attempt to make their way across this Valley of Death by seeking financing from the wealthy individual investors (business “angels”) and, later in the development cycle, from Venture Capital firms.

But because the angel market is dispersed and relatively unstructured, with a wide variation in investor sophistication, few industry standards and tools, and limited data on performance and VC funding typically oriented towards much later stages of development, capital remains very difficult to obtain for many high-technology start-ups.


The SME Instrument

In this spirit, the European Commission launched the SME Instrument within Horizon 2020 in the purpose to address a key funding gap in financing for small early-stage companies that is well recognised as a major barrier to innovation.

The instrument addresses the financing needs of internationally oriented SMEs, in implementing high-risk and high-potential innovation ideas. It aims at supporting projects with a European dimension that lead to major changes in how business (product, processes, services, marketing etc.) is done.

The purpose is to launch the company into (new) markets, promote growth, and create high return on investment. The SME instrument addresses all types of innovative SMEs so as to be able to promote growth champions in all sectors.

Unlike private risk capital which flows relatively freely during good times but plummets during economic downturns, this programme provides stable support for high-risk ventures throughout the ups-and-downs of the volatile business cycle. It cushions economic shocks that might otherwise lead to major extinction events for the industry.

To achieve these goals, the SME Instrument project has been bolstered with an €3 billion budget until 2020.


A piece of Advice: 3 steps you should follow


Define the reasons for application

Are you an entrepreneur who has established your own startup/SME? Is your startup/SME based on an innovative IT concept, product or service harnessing the potential to disrupt existing markets? Moreover, don’t hesitate to use the SME instrument basic eligibility check which can tell you if your project is eligible or not.


Build up your business strategy

You are an entrepreneur, planning to start your Startup / SME or have already started and are in the early stages. Your startup / SME is an innovative ICT based concept, product or service which has the potential to ultimately disrupt existing markets.

Bear in mind that a professionally written business strategy is the first thing that will help you grow and sell. Whatever your capital source, you will need to demonstrate to potential investors and lenders that you have taken the time to research the market and competition, identified your target customers, developed a business model and have a marketing plan in place to accomplish your goals and achieve success.

In short, you will need a well polished and compelling business plan that will satisfy lenders and get you in front of potential investors.


Check the application process and start implementing

Make sure that:

–  you know the deadline for the phase you apply for. There are three phases: phase 1, phase 2, phase 3, each of them having a different deadline in each semester of the year. All proposals are submitted online;

– the written proposal has met all the requirements proposed by the European Commission;

The Commission has an online register of the organisations participating in the EU research and innovation or education, audiovisual and cultural programmes. This allows consistent handling of the organisations’ official data and avoids multiple requests for the same information.


Interested in learning more about EU funding opportunities for your startup?

The EU Startup Services Team can provide you the useful information you need for every phase of your application process. The services include consulting, evaluation, proposal writing and workshops.

The EU Startup Services Team worked with more than 1300 startups, operates in 21 countries and has held 33 workshops on EU Funding so far, with 9 successful proposals in the last year. The representatives can provide expertise on who should apply, when and which are the steps, but also help you choose the instrument which best fits your stage and your current needs.

Planning to attend the upcoming workshop? Here you can find all the details you need.


[1] Source: Fortune, ‘The Unicorn list 2016’; ‘Unicorns’ are start-ups with a market value > $1 billion


Picture credits: Susanne Feldt
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