As Europe’s startup ecosystem grows, so too does the remit of its biggest investor, the European Investment Fund (EIF).
The EIF now has more assets under management than ever before (€143.7bn) — and a longer menu of ways to assist Europe’s fast-growing tech companies. It’s increasing the size of the cheques it will write into scaleup funds and upping the average venture debt ticket too. It also wants to grease the exit wheels; helping companies and investors get ‘out’ faster, while remaining in Europe.
“We’re looking to create a funding platform across the full spectrum of the funding cycle of companies, that deals with every single possible request a tech company in Europe could have in its development,” the EIF’s head of equity investments Uli Grabenwarter tells Sifted over a video call from Luxembourg, where the fund is headquartered.
Alongside those ambitious plans, it’s as busy as it’s ever been with investments in early-stage VC funds, as geopolitical uncertainty keeps some investors away from risky assets.
“We definitely see a very, very significant increase in our deal flow,” adds Grabenwarter. “In a market environment where the best funds can get to the market without having to rely on any public sector money, there would be less pressure on our side — but in times like this, basically everything that moves in the market knocks on our door.”
‘Second valley of death’
In June, the European Investment Bank (the majority shareholder in the EIF), launched a one-stop-shop funding platform, dubbed TechEU — and announced €70m in funding for startups and scaleups for 2025-2027.
It’s part of a big push from the EIB to help homegrown tech companies scale — and stay in Europe.
“Everyone is speaking of a second valley of death for European companies,” says Merete Clausen, the deputy CEO of the EIF: the first comes before a startup finds product market fit; the second comes when a company tries to scale — and perhaps struggles to find growth capital.
There have been several moves to help scaleups avoid that fate. In 2023, the EIB launched a €3.75bn fund, the European Tech Champions Initiative (ECTI), to back growth-stage funds raising €1bn or more — which would in turn provide the capital Europe’s scaleups are said to lack.
In addition, the EIF now also aims to increase the size of the investments it makes into scaleup funds from €70m to €100-150m, on average, says Clausen. It will also boost venture debt cheques from around €25m to €75m, she adds.
The EIF’s also looking to introduce more novel instruments — like a kind of venture debt that would enable one European company to acquire another.
“When it comes to the tail end of the development chain of companies, the market in Europe needs a different type of liquidity,” says Grabenwarter.
That could be funds with buy and build strategies in the private equity space, or private credit funds that provide non-dilutive capital in order to facilitate mergers and acquisitions.
“Or it can be one of the European players seeking to acquire critical mass in a specific sector and saying, ‘Ok, in order to do these acquisitions that I see possible in the market, I do need funding one way or the other’, and one of those options could be going to the EIB and saying, ‘Can we have some form of venture debt or project finance that allows us to do acquisitions?’,” he adds.
But why, I probe, does it matter if an American tech giant buys a European startup for a tidy price and gives those founders and investors a hearty pay day, to be recycled back into the ecosystem?
“We believe that Europe is better than being the incubator of the United States,” says Grabenwarter.
Reverse brain drain
The US’ self-sabotage isn’t yet having a notable impact on business decisions, says Clausen — it’s too early to see whether European companies are delaying, or abandoning US expansion, or if American companies are heading to Europe in greater numbers than before.
But, looking at the EIF’s portfolio companies, there has been a notable uptick in talent looking to relocate to Europe, says Grabenwarter. “The brain drain that we have been observing for many years between Europe and the US seems to be reversed, at least for now.”
Market movements
It’s a busy time for the EIF’s team, says Grabenwarter, as fewer non-European investors are actively investing in European VC firms, leaving all the more work for the EIF to pick up. “In periods of uncertainty investors typically retreat to their home territories. So we currently see less investors from the non-European markets, because they find enough opportunities at reasonably priced valuations in their own markets.”
Company valuations have been “pretty much stable” since the beginning of 2024, he adds, while investment activity on the GP side has finally picked up after a few years of cautiousness. “I don’t think they are more comfortable with the geopolitical situation, but they are probably facing the end of their investment period and that triggers an increased activity in the market.”
There’s also been an uptick in secondary market activity, he adds, as those same investors seek liquidity before heading out to fundraise again.
Another trend bubbling up? VC mergers. “There has been increased interest and activity of fund managers to seek consolidation in the industry,” says Grabenwarter.
Would any VC go down that route unless they found themselves in desperate straits, I wondered?
“This is obviously an option for funds that are struggling in one way or another, to team up to be more resilient… But we do see a number of fund managers out there that genuinely strategically align, either to diversify into new sector verticals or cover new stages — from private equity into VC, or VC into private equity. I think there isn’t just activity out there that’s forced by market circumstances, but also by genuine strategic growth choices.”
Defence
But perhaps the biggest change of recent times has been the huge surge of interest in defence tech.
“Investors have loosened up their criteria for approaching the defence sector — it was an excluded or banned sector in 90% of investor charters — but that has flipped around,” says Grabenwarter. “The number of funds that have technologies in their portfolio that now expand into defence and security applications is increasing massively.”
The EIF, too, has embraced defence investments. At the start of 2024, the EIF announced a new €175m “pilot” pot, dubbed the Defence Equity Facility, to invest in VC funds backing defence tech. “The full amount will certainly be implemented — and we could probably implement more when you look at the pipeline,” says Clausen — although whether it will be topped up is down to the European Commission, she adds.
It’s now able to invest in everything within defence and security other than weapons and ammunition — including spacetech, artificial intelligence, quantum and unmanned vehicles such as drones. In May, the EIF announced its first investment into a pure defence fund; a €40m commitment to Amsterdam-based Keen Ventures Partners.
Meanwhile startups are also increasingly following the money — and pivoting or expanding into defence use cases. “We see more and more companies making more conscious use of the dual-use concept these days, to expand the civil applications of their technology to defence and security type use,” adds Grabenwarter.
If the defence tech boom continues for a while, we might see the reverse phenomenon in the future: pure defence startups finding consumer use cases as they scale. “Going forward, I think we’ll see technology that is developed in the context of defence and security which finds a purely civil application later on.”
Speed, scale, simplicity
At EIF HQ, teams are trying to be speedier. “We’re squeezing the procedures wherever we can,” says Clausen. The goal is that all applications for funding receive an answer within six months (a target which is mostly already achieved, she adds).
As part of this push, the EIF will spend less time assessing fund managers that it’s already backed multiple times, “that have grown into blue chip firms today, that we know inside out”, says Grabenwarter.
It will also communicate more clearly with fund managers that are “very far from being investable,” he adds, and offer them something closer to “technical assistance” to get their proposals ready to pitch to other LPs. “We have to tell them, ‘You’re not even getting due diligence [yet], because we don’t think that you’re fit for that’.”
The third of the EIF’s guiding principles of the moment — scale, speed and simplicity — is a dream for plenty of members of Europe’s venture ecosystem.
But do the duo from the EIF think EU Inc, the movement to create a pan-European legal entity which all new companies could use, has any legs?
“I think I almost need to claim the Fifth Amendment. It’s such a long standing attempt, which has never really materialised. If it happened, it would be brilliant,” says Grabenwarter. “My humble guess is that as long as the tax regimes are at a national level, the creation of an EU Inc is not going to make a big difference.”
Clausen is for any kind of simplification the ecosystem can get.
“Simplification is an overall worry for everyone — companies, funds, us — and in particular when we work with the EU budget it becomes very complicated. We have so many mandates — not only from the EU, but also from the member states. We’re always asking for simplification.”
Read the orginal article: https://sifted.eu/articles/eif-interview-uli-grabenwarter-merete-clausen/
