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EIT InnoEnergy: ‘Not many start-ups pass muster for us to invest in’

How do you go about scouting the start-ups that you invest in?

“We start by locating and selecting approved start-ups that are for the most part still in the planning phase. The entrepreneurs already have their technology in mind. They have put together the components for that in a lab or a shed, so they know that it works. But they don’t yet have a complete product by a long shot. Their business plan is usually still just a rough sketch.

We are interested in start-ups from that stage onwards. We try to support them until they get their first commercial customers and start scaling up their product. At that moment, the risk associated with that company is mainly to do with the market and no longer with the further development of their technology. Lenders are often averse to any technological risk because you can’t just sell it off. Whereas market risk is something that you can sell off.

Why can you sell off market risk?

“If a technology doesn’t work, it won’t help to throw money at it. It works, or it doesn’t work. While if a product doesn’t gain enough traction in the market, you can change the marketing strategy. With an aggressive marketing strategy, you can buy out or even take over competitors”.

How do you locate start-ups to invest in?

“We organize events for that reason. We have global calls, local initiatives, and our own ecosystem. Start-ups find us through all sorts of channels. Every year we look at about 6000 start-ups on a European level. On a Benelux level, that’s about 500 to 600 start-ups. An x-number of candidates rolls out there, who we carry out analyses on. Of these, 50 are left. In the end, three or four candidates emerge that we actually enter into an investment agreement with. So, not many start-ups pass muster.”

What do you talk about with the start-ups during the selection process?

“We then try to figure out their position. We look at where they are now with their technology and where they want to be in a number of years’ time. We discuss with them what is needed for them to bring the technology to such a level that they will be able to sell it as an industrial product.”

Do they need to have a timetable that shows when they will reach their goals?

“We measure them on their technology readiness level, TLR. Then we discuss what they need milestone by milestone. What kind of validation is needed? Which sort of lab should they run tests in? What will their supply chain look like? We then make a step-by-step plan together, a roadmap. Then we consider what we can provide, what they need money for, what we need to leverage our network for, and what services they need in order to grow.”

“Aside from technology, this also involves legal services and personnel planning. That process usually takes about eighteen months. Sometimes longer, depending on the technology.”

“If all goes well, you start to see the first signs of growth, commercial customers, and money gets credited to the account. Usually, someone says: You are successful, so go and get some money from the customer. But of course, that’s not how it works in practice. Not one bank says: ‘Nice, you have a customer, here – have some money.'”

“This is followed by a frustrating phase of pitches with potential investors in search of capital. They often get reactions like: ‘If Pete invests, then John also wants to get on board.’ Halfway down the first growth curve – towards the A-series – it’s time for us to position ourselves for an exit. We invest from the seed stage onwards in order to accelerate the technology to a product that is finished and ready for the market. Generally speaking, this entails an M&A deal or a trade sale where the ventures grow to the next stage.”

If a company buys your shares in a market-ready start-up, do you invest the proceeds into new, younger start-ups?

“Yes. We at EIT InnoEnergy are thrilled if we bought a share for €1 and get to sell it for €10.”

Does that ever happen?

“Yes.”

In more than 50 % of your investments?

“No. We have an extremely high-risk model. We need 20 % of the start-ups that we invest in to cover the costs of all of our investments.”

Does that work?

“Right now it is working in the Benelux. We are still relatively young as EIT InnoEnergy in Eindhoven. Our first shareholdings date from 2014. We have only been busy with our first exits since last year. This looks pretty good at the moment. The value of our portfolio is progressing really well. We’re generating a positive yield. The target for this is at least a factor of 5. That means that where once put in €1, you now get €5 in return.”

And on a European level?

A few years ago we were out of our depth on a European level. At that time, the portfolio would have yielded less in sales than what we had put into it. Currently, we are at 2.5. Covid-19 will make a dent in that this year. I think a number of valuations will go under. But the prospects are encouraging.

What percentage of start-ups crash?

“We write off between 25% and 30% completely. 20% are doing very well. The rest are doing okay. It’s the last group that gives you the most work. This is where you have to invest the most in order to still get something out of it.”

Does the 25% to 30% that you write off end up shutting down?

Yes. They end up going bankrupt or going out of business.”

How many start-ups are you investing in at the moment?

“In 223 start-ups in Europe, 27 in the Benelux.”