Episode 16: Equity instruments under the European Regional Development Fund, the ERDF

Can you tell us a little bit about how that worked for you? Did you have enough companies to finance that really work to have this kind of more narrow down approach to the sectors that the instruments covered?

Henrik Storm Dyrssen: It's always a hen and egg problem, you know, is the market there? And I think we were lucky with this timing that the policy fervour for green tech kind of there around 2014 when it started last sort of regional fund period, that was also, in fact reflected in the markets. And when the fund came online in I think 2000 was 16 or 18, I have to check with 30 instruments. It starts to get a bit shifty on the details, but at the same time Growth capital started to pick up a little bit, so noticing a positive market trend. But the trend in the market was for early-stage growth capital, not early stage or pre-seed seed rounds. So we saw a role where we could be a feeder fund for this growing growth capital for cleantech. And it's been interesting to kind of figure out where a cleantech fund goes from there, given the kind of rapidly developing environment, an element of that has been something perhaps, that you wouldn't think of the first time is operational integrity. So if you have, in our case, it was a public investor, a public organization that had the mandate. And when the market around it grows, their staff, who are now experts in cleantech, become very attractive in the market. So how do you keep, you know, resource integrity over time fund runs for, you know, many years or funds run for over 15 years. But another lesson was how powerful and promising. We're still in evaluation, and we'll keep evaluating the green element and the kind of carbon reduction. But what we're seeing is how powerful venture capital can be as a green policy instrument, because you finance innovation that in turns bolsters industrialization of new green practices, products, and so forth, which in turn turns into scale green, you know, development at scale. So if you can measure that first, second, third tier kind of effects, it's suggestively it's quite substantial. And the companies have continued to grow. And it's been an interesting challenge of trying to keep the fund in the early stages, while at the same time giving it operational freedom to also make bigger bets and follow on into growth where it's needed. And so the Green Fund has quite a wide mandate. But I think that the end how it supported its portfolio, it's made a choice between partly supporting very early stage and partly supporting promising growth companies that still do have a challenge kind of finding that that market financing.

Thank you, Henrik, this is a really interesting. And we're also extremely happy that we can feature your example as well. In we have featured already the ex-ante process in a case study, and we are currently as well, working with you and the colleagues to describe the financial instrument in more detail in another case study. So, for all listeners, stay tuned in the next months for this new resource with us. And an important topic as usual, the selection of fund managers at the EIF. How do you approach this topic? Maybe you can share with our listeners some secrets. What is especially important when selecting the right fund managers? 

Vivi Papasouli: The EIF is notorious for this sort of selection process when it comes to fund managers. I'm sure a lot of fund managers out there would have a lot of stories to share from their side having gone through this process. European Investment Fund has a dedicated, experienced team of our equity professionals in Luxembourg, responsible for the selection and evaluation of the applicants, of our fund managers, irrespectively of the mandates we sign and of the regions where we deploy the resources. First, these experienced teams of the EIF bring on a pan-European experience. It's very important that they have a well-rounded expertise in house in selecting the professionals. We want to work irrespectively of the regional mandates we bring to the table, as they bring their objectivity irrespectively of the specificities of the mandate that we, as mandate managers, bring to its country or its region. In brief, due diligence is not a checklist of yes or no, we must take everything with a pinch of salt. I think the key criteria our teams assess, include the assessment of the management team, whether this management team brings the experience we want, the skill sets. We want the assessment of the composition, the track record they bring on, the stability and commitment to the fund’s life cycle. This, as we always say, is a long-term marriage as we all come in this long-term investment of time and commitment. We investigate the market they target and whether it makes sense of the market needs, the feasibility of the strategy, the existing competitors, the team differentiation, and the unique selling proposition. We investigate the deal flow, the track record they have, the quality and relevance, the credibility of the plans to develop that deal flow on the market, the investment strategy they bring to the table, including the fund size, sector, geographical focus, the number of targeted investments, etc. Minimum target size, maximum size, the balance between the fund sizes and the follow-on investments, and development under the proposed terms. The operational budget including the fees they propose, the costs, related carried interest, and the expected returns. In need of some evidence that the fund is on a commercial basis and that it can be expected to be financially viable. The investor base, evidence of support from other investors, and the expected timing of first and final closing. We also need the team, making investment decisions, be independent. This is important for the EIF. It is a combination of all the criteria that our teams assess with our experts in Luxembourg to help the successful applicants achieve the due diligence stage.

This sounds incredibly comprehensive and seemingly a complex process. It seems that the experience of the fund managers is very important in providing this information. Does it mean that the first-time teams don't have a chance? How is it in EquiFund with the first-time teams participating? 

Vivi Papasouli: On the contrary, first-time teams are always welcome to the EIF. This comes hand in hand with our regional business. I'm taking a part in the intrinsic development mandates we implement and help nurture poorly developed ecosystems in Europe. If the EIF did not invest and support first time teams, the ecosystems we developed in Greece, Bulgaria, Romania and all these countries would have never developed because it's always a notion that the underdeveloped ecosystems lack startups. They lack the experience of existing teams on the ground as well. So, first time teams are always welcome. They only need to bring to the table the combination of the elements that we discussed. For example, the level of the expertise of the management team, an established team will bring in its previous generation fund, but a new team can always bring in separate CV's, separate expertise, separate track record, and can build together a complementary team with complementary skill sets from different backgrounds. All in all, in my view, established teams do not have an advantage. I'm afraid both emerging and existing teams will still have to go through the rigorous due diligence process EIF has become famous for in the EU VC market.

Has the landscape of fund managers change throughout the recent years in Greece? How did they evolve in the time working with you as part of EquiFund?

Vivi Papasouli: I think it has changed significantly as I mentioned, the nascent ecosystems come with a nascent experience at all levels, both startups and fund managers, in the asset class of investors. We need to train investors in the ecosystem on what it means to invest in the VC market. When the EIF starts investing in this market, it gives a seal of approval for the fund managers it selects, helping to leverage private money. Henrik already alluded to that, mentioning the professional investor that helps other investors come in to the market. When we started the EquiFund, I think out of the nine fund managers, six or seven were within first time teams. This helped develop that part of the market. We were there to entrust the first-time teams on the ground, helping them develop and build expertise, respecting their full independence in investing and taking investing decisions, and independently managing their funds. This goes without saying even for first time teams. I think, the Greek fund managers we supported will agree with me in saying that building the Greek VC and private equity ecosystem has been a great educational experience for all of us on the ground.

Thank you very much. That's really interesting hearing you had so many first-time teams, and that it was also a good learning experience. In the end, the results are impressive. Congratulations once again. Henrik, could you tell us a little more on how you selected your fund managers in the past?

Henrik Storm Dyrssen: The standard that EIF sets in the European venture market in terms of selecting fund managers, is common across a lot of actors or LPs investing. For us, as a managing authority, and I think Vivi also alludes to this, a project, spanning multiple years, supporting policy making, is a learning journey to everyone involved. We started out some fourteen, fifteen years ago, building a new public investment organization from scratch. At that time, we could designate that organisation or it was determined that we could designate that organization as a recipient, an intermediary for the money. Several years later, in our second generation, the strategy evolved to where the notion of investing into new teams was a different kettle of fish. We had a public organization that had set up a few funds, but we wanted more market-based funds complementing that and the partnership with EIF. Indeed, that was very helpful because EIF sets a high standard. That means working with EIF is demanding in terms of a learning journey, but it also means that you get all the professionalism that the EIF has in terms of the actual implementation and management of the mandate, which takes a lot of weight off our shoulders. They're more experienced in investing in the private market, still with an openness to new teams, as we've mentioned, and you work there at the margins once again. In 2016 there were some regulatory changes clarifying the need for a competitive tender, some competitive process to assign intermediaries. We'd already set up the second generation then, but the implementation of the first Green Fund was late in starting and was affected by this. That was procured in competition with one of Sweden's largest banks bidding for that offer. In the end, the public investment organization we supported previously happened to win that mandate. Fast forward to the latest generation, we've done even more homework than in the new reality. Being procurement and procuring venture capital is not exactly run of the mill and standard in the market. That's been a positive learning journey in terms of understanding how helpful EU regulation of procurement is. You need the access to the expertise, but if you have this access, you understand what the limits are but also the optionality and the possibilities, and you have people helping you to navigate that. In a consortium of resources, we've been able to navigate through that process and put tenders and calls out into the market. We chose a negotiated procedure with a prior call. The difficulty here is if you want to define, especially if it's going to be something innovative, it's going to be very hard if you're going to define at the outset what this fund needs to be doing in order to evaluate it. You put yourself in a difficult position because you don't even know who's going to bid for it, and you don't have the flexibility of a more discretionary investment strategy like the EIF has, or process where they can check out the market, put out some feelers knowing what they should be doing and then negotiate their way forward. Yet there are options like that in procurement regulations. We chose a negotiated procedure we had a call for an interest to learn. Who might be interested? These organizations might be interested. That puts a different colour on it. We could go deeper in to this. We might have to be lighter and broader in terms of this criteria. Then we put out the selection element where they applied to be in the process. Then we checked for operational integrity experience and so on, that these organizations had some substance to them and the general capability of running this operation and mandate.

Henrik Storm Dyrssen: Following that, we got even more feedback, and then we started edging towards the actual bidding process of deciding what criteria should set organizations apart and in line with maximizing policy utility. That's when we could start to fiddle a little with how much emphasis should we put on organizational strategy, and how much on market strategy. We ended having quality weighted pricing model where they bid on the price and they also bid on strategies for implementation and then the price that they had chosen to bid with was adjusted by the level of quality in terms of how we value the strategies and we got some good interest. We have our first private organization that won one of the mandates, but the instruments are still very much early days in implementation, and not all of them are or have been put to sea, yet have been christened, as it were. We're just there at the cusp. It's been a learning journey, and I think, we put a lot of emphasis on organizational integrity to make sure that if we're going to direct invest, we don't want to do too much of the heavy lifting for them. They need to be ready and capable to run this kind of organization or operation.

Thank you very much for sharing. This is quite an innovative approach we don't hear of often. The full range of the public procurement procedures is looked at and really the most suitable chosen which might not be the typical one like the open tender, for instance. Thank you very much for sharing this insight. Very helpful. What are the sweet spots of your fund manager, Henrik? At what stage, for instance, pre-seed or seed, are the companies receiving investments? What's the typical ticket size? 

Henrik Storm Dyrssen: Generally, you might say seed funding. The stages definitions vary by markets and that's a little less transparent and then perhaps ideal to use these terms. Our funds invest somewhere between €300,000 and €1 million on average. Our green mandates have an optionality as high as €7.5 million which does not represent their everyday business, but follow along. The focus, however, has been on seed stage, being there at the cusp of the market’s readiness to handle any potential gaps between angel financing and professional VC fund financing, where we create instruments that support and accelerate angel financing, while at the same time bridging to professional VC financing.

Thank you. One of the topics that might inspire as well other authorities programming ERDF resources is how do you define innovation? How do you define the innovative company?

Henrik Storm Dyrssen: Defining innovation. That's a heavy load. I think we've taken some tags from what ERDF talks about when it talks about innovation, product innovation, services, and business models. That's the element that may be added in terms of colouring our instruments supporting the circular business models, trends that have developed over the last years. Product services and business models, and new innovations in that regard, are exactly what we've instructed our instruments to try and look out for. 

Could you share an example of an innovative company that received investment, through one of your equity instruments?

Henrik Storm Dyrssen: I have one favourite example, which is Renew Cell. It's a company that developed a process to enable better reuse of cotton and cellulose based textiles in order to drive circularity in the textile industry and that's a nice idea. It grew out of research labs at university, and got pre-seed funding from public university related investment organizations prior to our instruments. As it was going to the market, as a promising product it did have some traction, but ended up in a financial situation which could have been detrimental to the company. Indeed, cash flows can kill any company at any stage and even more the early companies. Our instrument was able to bridge that situation and then continue to follow on invest. It ended attracting venture capital and even going public. That's really an A-to-Z journey, illustrative of our instruments, taking an intermediary role between Angel capital pre-seed oriented university closed capital and the commercial markets, not always providing a volume of capital. Perhaps supporting a particular situation so that a promising company that just happens to be in a slump or a challenging situation doesn't have to die, but might scare off other investors at that point. Though you can take a bet on a company like this and say, this is probably temporary. Let's dare to do it.

Thanks a lot Henrik. Vivi, do you see innovation in a similar way in EquiFund? How do you support innovative companies through EquiFund? 

Vivi Papasouli: Echoing Henrik's concerns on the difficulty defining innovation, I think he has a very fair point on product services and business models. I would like to extend this in that it is so difficult to define innovation that I would use an example that we had. A Greek company that used the business model, common in Europe. The guys pioneered it in a new market in the Middle East where it was not common at all. This startup was our first successful exit of the EquiFund portfolio. Then defining innovation is not always easy. You can be innovative in pioneering a new market with something that nobody has thought before you. You can be the first one anywhere in a new product, in a new service, in the way you do business, in the way you track a new market. That said the company was not even in an innovation window. It was at the early stage, but that's a different discussion now. Under the innovation window, as I mentioned in the beginning, Greece has a very good track record of research centres and ideas. We investigate how it could support tech transfer. How could it really help these ideas from the research centres and the universities transform into commercialization. We try to have two main compartments, the technology transfer part, aiming to commercialize the results of this research centres, and an acceleration part where we help the cultivated ideas and initiatives to bootstrap and hit the market. The tech transfer part was mostly targeted by two fund managers, and it was very hard work on their side as well. It really required a hand on in getting the ideas out of the research centres in order to make them into more commercial products.

Thank you very much, Vivi. Would you have any other examples that might be interesting to hear in terms of the innovative company, to get a feeling of what companies did get the investments?

Vivi Papasouli: Inevitably we always turn into the success stories because these are our best examples. The first one that comes to mind is Augmenta, one of our most innovative and successful stories. It's the one I use because it's not the usual suspect. It's a company that thrived in the agricultural sector, which is not something you expect to hear in the startup ecosystem. So it's a company that developed a system that utilizes high definition cameras to scan every inch of a field as a tractor drives through it and then performs machine vision to identify the status of its plant in the field, and controls how the sprayer actually applies the amount of chemicals required on its ends of the field. The company is on a mission to augment the capacity of arable land and help feed the growing population sustainably and automating the most impactful farming operations, such as fertilization and pesticide spraying. It's on a mode to achieving the sustainable growth of agricultural production. The interesting thing is that it was founded by two young farmers that were fresh out of the university engineering school. The guys were not on a mission to create a company. They were just farmers. As they started working the field, they thought, there must be a more efficient way of fertilizing the ground, of using the pesticides, and other. They built the company from scratch, and the company was then entrusted by one of our early stage funds. Our fund was the first one to meet the guys and then thrust the company back in July 2018. It was the first to participate in the financing round of €600 thousand at that time. One year later, the company raised €2.5 million. It kept growing, kept developing its product, its AI and machine tools. Two years later it raised its series A of €8 million. In March 2023, almost a year ago, it was acquired by a global leader in agriculture, construction equipment, technology and services for €110 million. Although post-acquisition, the company remained in Greece. The acquisition money is used to build the team in Greece and they really are expanding the team in Greece. Augmenta is setting up the European innovation hub of CNH, which is the global leader that bought them out in Athens. I'm putting this out there because we always hear these concerns of companies that are bought out by global leaders and then we lose all the momentum. Indeed, our experience is that when these companies reach that stage, they have enough leverage to keep the teams on the ground, to keep developing the R&D on the ground and to build the innovation hubs where they were first founded. We have seen such or similar examples in other innovative companies in Greece.

Thank you very much for sharing this example. Henrik, do you have a similar experience in terms of exits and global companies buying them out? 

Henrik Storm Dyrssen: I would say that I don’t have a check on the entire portfolio. We have sort of trade sale exits and similar because most of our capital is of general purpose venture capital. The companies are not necessarily that prone to foreign acquisitions. It gets a little more complicated when you get into cleantech. We're still in the early days even in the first Green Fund cycle, as it entered its harvesting period and you could easily see foreign acquisitions. I think a successful exit is a successful exit. Follow-on investments is a different kettle of fish. Philosophically, you can make money, you can be efficient with taxpayer's money and support companies and growth. At the same time we want to avoid complementing the market. Our funds follow on with evaluations, where it's not entirely as obvious that it's not crowding out other potential capital and so forth. An advantage that we have is that our funds are relatively in the early stage and their exit market is mostly the Swedish venture capitalist funds. A little later at the growth funds. In that regard, a lot of the portfolios tend to stay close to home. That's perhaps not the end journey for a company per se but it does help a little in terms of us taking responsibility for it. The companies have the chance to grow and explore themselves in Europe. However, it is becoming increasingly challenging in elements as a more advanced technology, including the life science, clean tech and deep tech, where with an immediate international interest even at pre-seed stages, it becomes a new animal to deal with.

Thank you very much. Concerning the beginnings, the very early beginnings of companies, current CPR provides broad possibilities to combine grants and financial instruments. Through fi-compass we investigate those possibilities. In fact, this is one of the topics that our workshop in Athens will tackle. From your experience, when much nearer to the life cycle of a company, are there any specific circumstances where startups might indeed need grant support, either before or alongside an equity investment? If you have a view on that, Henrik?

Henrik Storm Dyrssen: Generally, that's interesting and I think it's an interest that had grown in between programming periods. We haven't put it to use yet, but we've been very curious about it for the last couple of years. The reason for that is that it's quite an unusual offering in the market. A market VC fund doesn't provide grants at all. Whereas loans and other kinds of financial contingencies could be helpful. That's another kettle of fish, but especially when it comes to a couple of points. Financial literacy and investment readiness are generally poor even in Sweden, with a relatively developed financial market. The competence exists at a market level and clearly exists relatively well in concentrated financial centres. Though talking about financial literacy among entrepreneurs it is not democratically distributed. That's something that we've been talking about a lot and exploring synergies without having blended instruments. We've sort of started having very fruitful discussions with program managers for the ERDF program. Could we synthesize blended instruments by having calls for financial literacy training in the regular ERDF programs that happen to complement very well the financial instruments. As such, another specific market segment is coming back to clean tech, deep tech, life science, where you have the prolonged development cycles of companies. One challenge is that even in the best cases, when you have a really promising company, it takes time to develop. Even if it garners a lot of interest from investors, it can end up diluting. The entrepreneurs lose control but also engagement into their creation and that's not anyone's fault. It's almost mathematical logic in the markets. That's an interesting element where if you look at the EIC, for example, it combines grants and equity, specifically for these target groups. I think it makes a lot of sense. We have a journey to go in terms of combining our slightly separated policy systems because we have an innovation authority that provides grants to these target groups, and then together with others we work on investments and converse more with each other in terms of achieving focus for business policy initiatives and instruments at a broader scale.

Thank you very much, Henrik. For our listeners, those who are not familiar with the abbreviation, EIC stands for the European Innovation Council. There is the scheme that combines grant support. Then there is an investment component. We will feature this during our Athens event and I'm looking forward to the discussions about the complementarity. As well as the lessons learned from both sides. Now, Vivi, would you perhaps have some companies in your portfolios that received investments from both EquiFund, and benefited from grant support? What is your view in terms of grants prior to equity investment, perhaps for some specific types of final recipients? 

Vivi Papasouli: Thanks, Anna, we are looking into it. We have all been discussing throughout this programming period and I think we are all looking forward to the discussion that will happen in Athens. There is a lot of anticipation for these discussions at the fi-compass events. There is a balance to be taken between grants and financial instruments, for sure. As I mentioned in the beginning, I don't think equity financing is the solution for everything. We do need to find middle ground on when a company needs to take a grant, at what stage it becomes investable, at what stage of its life it needs equity financing, and when it graduates to more traditional financing sources. We have had companies in the equity fund portfolio that have received grants that do not blend with equity, and we have had companies boarder line the life sciences sector that received grants in the earlier investment stages. For example, Bio bricks, a company that commercialize the novel molecular diagnostic device for acids detection. I will not go into the details because I don't know them, to be honest. It's very technical. The guys received the grant from the horizon program back in 2020, in partnership with other partners at the EU level, and it also received at the later stage the equity financing from one of our fund managers in the innovation window, the Metabolon fund. Indeed, companies can explore different financing options depending on their development stages, product development and their needs, and what part of their business plan they need the support with. Equity financing can finance parts of the business development that the grant might not be able to support, as eligible expenses. Not to mention that equity financing is more about smart money. Equity financing is not only about getting the money, but it's about “buying” the experience off the fund managers, getting them into the game, their expertise, knowledge and mentorship in terms of developing the products, opening new markets, helping them out in a million of other things, as for instance, on product development, marketing, networking, and on a million other things depending on their expertise. Henrik also mentioned that somewhere between Grant and VC investable lands there is the area of angel investments. That's important in EquiFund. When we started out, we had targeted this part also in the innovation window in the hopes of that innovation window targeting the investment stage. The innovation funds provided tickets that were a little bigger. Yet we did have a financing gap in Greece for the business angels. I think it's also important to mention another initiative that we put on the ground a couple of years later with the business Angel Co-Investment fund. Now, that was a fund that was put on the ground to help the companies, somewhere in the middle, to finance them, to make them VC investable. To help the initial ideas bootstrap and get to the VC pipeline. It was a fund that has helped us make a significant boost for the business Angel network in Greece. That was under the radar up until then. One more point. I would like to mention that the business Angel Co-Investment fund was fully funded by the flows of the previous Jeremie mandate that the EIF had deployed in Greece. It is important mentioning that these ERDF initiatives, the equity financing initiatives, or financial instruments initiatives in general, be debt or equity, have this potential. The evolving nature of these instruments is important for the public budget as well, because they bring back money to the public resources that then can be reused to finance SMEs for the same purposes or for more initiatives on the ground.

Thank you very much, Vivi, it is great to hear that also reflows were used in this regard. It is hopefully as well an inspiration for others. Now let's continue. Looking at the life cycle of a company, as a company that you invest in needs growth, it might need more investments. Vivi, in terms of EquiFund, your fund managers, do they already plan the resources for some potential follow-on investments for their portfolio companies, and how is it best to plan ERDF resources for such follow-on investments? 

Vivi Papasouli: Yes, of course, follow on investments are a prerequisite for companies to grow and for fund managers to double down on their investments and ensure successful exits. This is the way the market works. Follow-on investments are already foreseen in the investment strategy and the budget of any fund, whereas the investment strategies of funds do not make sense without follow-on investments. Now, what is interesting is what you mentioned on how we plan the follow-on investments when we have ERDF resources coming into play. Inevitably, we need to consider the regulatory provisions and the requirements in planning these follow-on investments. The regulatory frameworks in between the cycles of the EU budget, or what we call between us, the seven years programming periods, in terms of the terminology, the provisions do not always operate in our favour. There is usually a mismatch between the seven years programming period and the life cycle of the funds that typically expands from ten to twelve years. I think as the EIF, we have the expertise required and we have a very good cooperation and collaboration with the national managing authorities. We have a very good cooperation with the EC services and our DG Regio colleagues. Together we always manage to figure out a way to make these initiatives align to common market practice, because this is also important for the fund managers to have initiatives on the ground that are as close to market practice as possible in order to make their funds deployable on the market. 

Thank you, Vivi and Henrik, how do you tackle the necessity of potential follow-on investments or how do your fund managers tackle that?

Henrik Storm Dyrssen: From the philosophical perspective, in terms of making sure that the handshake between the instrument and the market is gradual, because you want a co-investment along the way, eventually when you're handing it over to the market or the market increases its participation, there's this element of, whether you are being complementary in your decision making? Then you have the element that Vivi mentioned of regulatory elements, where if you can't spend the approved costs beyond the programming period, then that puts a limitation on things. For definition, most of our follow-on investments have come from exit proceeds, sales of companies, partial or wholesale, that are funded, and more follow-on investments. We also have escrow accounts and similar that can carry on a little more of money from the programming period to the sort of holding period or the harvesting period. There is some opening happening in the regulations on that point. It's now possible to connect previous instruments from previous periods with the new ones, but I'm not sure that's entirely straightforward. It's in the vicinity of the right direction. However, it's a limitation. There are probably good reasons to why the regulators have put it that way. I would stress another element, which is another challenge our instruments have is that a maturing company that's starting to take on perhaps the next stage of investors, more and longer-term. Investors need prior investors, able to convey confidence in the company as this handover is happening. The presence of a professional investor once again means they want to stay with the companies to make sure the handover to new principal investors is a good one, and they can support the company in that journey. There's a lot of factors coming into play here. Though generally, I would say that our managers have solved that in a pretty good way. There's always been resources following investments. We've had no red flags raised to us that we have no money for follow on investments and we can't support this company. Issues in that case are more often related to the force on exiting companies when closing the fund, there is always a timing issue, whether that's easier or harder, and whether the follow-on capital is there or not.

Thank you very much, Henrik. Vivi, the leverage effect achieved by EquiFund, we mentioned at the very beginning, is very impressive. How did you manage to ensure that the fund managers bring enough skin in the game? And what's generally the key to success to ensure sufficient co-investment? On project level, for instance. 

Vivi Papasouli: I think that there are two separate things on this, Anna, fund managers’ commitment. What we call - skin in the game – it’s a prerequisite for our funds. Our fund managers need to show that they are willing and ready to commit their own resources in order to ensure relevant alignment of financial interest with the other investors, private or public. Obviously, the level of commitment is assessed against and aligned with the fund size and the broader financial position of the team. So I'm not being irrational there. We want to make sure that they are willing to chip in the fund. Now, the leveraging of private investors, as you mentioned, it's also a prerequisite to any closing of the fund. The level of leveraging depends also on other technicalities, as the state aid regime. Without going into technical details, this can vary from 10 to 30% of private investors being the minimum. For the fund’s first closing, it rests with the fund managers, always. Today private investors money’ is required for the fund’s first closing. Though as mentioned, what we usually see in the market is that when a team has successfully managed to go through the due diligence process of the EIF, and the EIF has decided to entrust a team, it is typically a good sign also for other private and institutional investors to trust the team, especially in such markets where the asset class might not be equally trained, or, as Henrik mentioned, for other investors piggyback on our due diligence process when selecting a team. In the next levels of financing rounds it only depends on the company and how well it progresses and the products it brings to the table. This is fully on the company's growth.

Thanks a lot, Vivi. Henrik, anything different in Sweden in regard to that?

Henrik Storm Dyrssen: I'm trying not to be controversial, but I think leverage is a double-edged sword. It's good when you're building markets and you're after volumes of capital and growth. In a broader sense, you can leverage both when you're setting up an instrument of fund level, you can get it at the co-investment level for individual investments, and that adds up. In our case, it is the example of the partnership with EIF. We even had co funding from EIF, to co-fund sort of the precious Swedish taxpayer’s money or EU funds. And then we had co-investors at funds on top of that and then co-investment at the investment level. That adds up to enormous leverage. When we work with publicly run investments, it's also important that they don't take on more co-investment than necessary. If you have 90% co-investors, you can wonder whether the 10% stake was necessary at all in the market. So, it is a of a double-edged sword. I think between our instruments, we see everything from 3 to 10 times our kind of ERDF funds, which is pretty good but we are also hesitant. A good example is not to dive into technicalities too much. However, if you're in an attractive segment, where if a company matures, it can attract a lot of capital, be it digital, or perhaps a successful clean tech case, you can end up in your harvesting period. This might be towards the later end of a fund post, monitoring from an EU perspective. At the later stage of a fund you can have enormous capital coming into an investment and it looks like the investment has garnered insane amounts of co-investment. While it's a natural progress of events. Then looking at leverage and volumes of co-investments, I’d say that more is not always better. I'd focus much more on the quality of co-investments. Are these investors necessary for the company to grow, or are they good enough to lead onward growth of the company?

Vivi Papasouli: Henrik, if I may, I think this is, again, working on the margins of the markets. I think this is very interesting, the way you put it, this is a problem we didn't meet in the Greek case, as the public money in the Greek case, in the innovation window, took almost 90% of the funds and it was instrumental in terms of putting the funds into place. For us, it was never a doubt that without the public money, none of this would have existed, to start with. Yes, we had very interesting companies that managed to leverage the money in the market to be very open. I think nobody expected this much success in the market so early on. It depends. I think you are completely right. It definitely depends on the market conditions as well. You mentioned that there is a need for a continuous market assessment to stay vigilant of whether the public resources do crowd out or crowd in private investors and it is a very good point, we all need to stay on top of that game.

Henrik Storm Dyrssen: It's a good discussion to have though, because it forces a slightly deeper discussion of policy, relevance, and so on. Though the markets are completely different, as you say. Let's remember the origins of venture capital deregulation of Canadian pension funds that fuelled the post-war industrial machine in San Diego, later becoming Silicon Valley. Public capital has been instrumental in developing venture capital.

Thanks a lot for this exchange and let's talk results. Have you had any unicorns that you'd like to share with us? Any interesting exits? 

Henrik Storm Dyrssen: We're short of unicorns, but once again at early stage exiting to VC funds. We haven't done a full evaluation. We just closed our first generation. We're doing the full evaluations and it's going to be interesting to see where the companies are now. I think the potential for unicorns is higher in the green tech segment. Some parts of the policy machine talk about unicorns that are part of the machine, some talk about industrial scaling. Now, whether that means that a startup in particular becomes a unicorn or not, if it plays a pivotal role in industrial scaling of climate innovation, we're pretty happy about that.

Very good approach. Thank you very much. Vivi, how is it in Greece? 

Vivi Papasouli: We are as well short of unicorns, especially from the EquiFund portfolio. Greece is performing in terms of unicorn but not from our portfolio so far. Again, we can provoke a discussion of whether you would prefer a unicorn over ten companies valued at €100 million. That's a different discussion to have. We have been lucky enough to have already experienced several very successful exits in the fund portfolio, something nobody was expecting early in the investment period. We started having exits as early as 2020 from the EquiFund portfolio. I could easily mention a prominent one that was Sonos, founded in 2013. It's the world's pioneer in the development of AI in digital music production and processing. The company develops a patented machine learning and AI technology to enable audio and video professionals and non-professionals repair sound in their videos with the help of algorithms. It has been used as the solution of the company by Grammy winning producers. Now, what is interesting about this company, especially for the EIF, is that it's a company that was established, as I mentioned, back in 2013, it got some of its first support by one of the funds of the Jeremie mandate. So PJ catalyst was there to support the company in its early years. As the company grew, it obviously took money from other private investors and angel investors in Greece and outside of Greece. It was then supported by the next generation of the equivalent funds that the EIF supported with the Hellenic Republic money, namely venture funds and big bay ventures. In the beginning of 2022, news hit the ground that the company was acquired by meta, the parent company of Facebook, which was very exciting for everybody. I understand the company still has offices in Greece. The main part of the company has remained in Greece.

Thank you very much for sharing that. We are happy that a representative of this company will join us as well at the Athens event to speak a little from the company's perspective, what these investments are and how they help them grow. To summarize, what are your key lessons from the experience in Greece? What projects are you involved in currently? I know that you're perhaps working as well with RF resources.

Vivi Papasouli: Yes Anna. I think the key lessons derive somewhat experience. Not only in Greece, but in all the other countries that are in more developmental states, say in terms of the VC and private equity ecosystem, such as Bulgaria, Romania, Cyprus. The deployment of developmental mandates in EU regions where equity financing is not standard practice or has not been in the past years, and in areas that are lagging behind in financing the innovative companies and startups, it is actually instrumental to ensure a level playing field and supporting cohesion across Europe. I think these mandates are extremely important. The support of such initiatives through public and EU resources, Btdf or RF resources, wherever they come from, is key to these respects and creates also a virtuous cycle of financing, innovation and the ownership, as well as commercialization of research ideas. As the EIF, we are very proud to have supported and witnessed these ecosystems develop and now being mapped finally on the VC and private equity ecosystem again, even if not at the level of our counterparts like Sweden but getting there little by little. This has been possible through the continuous cooperation and the collaboration with the national authorities, the EU colleagues, the fund managers on the ground, all the relevant stakeholders, the national promotional banks - everybody has been part of these endeavours on the ground. It is essential that these initiatives continue so that we avoid financing gaps. With consistent support to the success stories we see them scale up, so that the positive impact keeps evolving on the ground. In terms of the future, I think I will go back to something, Henrik said. In the beginning, when these ecosystems grow, as he mentioned, when it gets more genetic, then the market develops and starts to have depth. In Greece, for example, the National Promotional Bank for investment, HDB, has taken over the more generic VC strategies, and is supporting the funds exploring more generic investment strategies. In cooperation with the Hellenic Republic, we are looking into more thematic sectors. We are launching an initiative on life sciences, as we believe it is a more prominent sector in Greece. This could only have happened because of the ecosystem developing and evolving in the past years in Greece, and I think, as Henrik mentioned, they were in the second generation of their funds already some time ago. If you meet the two markets, you see that we are evolving to that direction. For me, this means the ecosystems grow in all the regions of Europe. It's something we are very proud of and it's something that we are very hopeful to continue helping the ecosystems succeed.

Thanks a lot, Vivi and Henrik. What are your plans and ambitions for the future?

Henrik Storm Dyrssen: I think it's a very interesting policy cycle that we have ahead of us in the coming years, as a lot of things are happening in the rest of the world around us. It's going to be interesting to see. It seems like the economy is partly growing as never, while the policy supported parts and other sectors in the society are not growing quite as much. In the role of complementing the market, you can't afford a guessing game anymore. You must be a little more sophisticated. It puts more work on us but we're happy for that. We're talking a lot about deep tech and clean tech these days. Not enough about life science and health and it's a strength for Sweden, not the least. I think that the health questions will come around the corner in the next policy cycle as the generation of the baby boomers are aging and so forth. It's going to be an important question, but it does pose some questions that we've talked about here. How do we ensure that we have a lot of innovation in Sweden? More and more countries are catching up in terms of developing financial sectors. Happy to hear about the segmental focuses of the instruments going forward in Greece. You can look at sort of sectoral strategies in a relatively nascent market, but I think that exit markets and scale up capital for high tech is going to be something that EIF talks about, and many others. I think we talk a lot about having capital for our future high-tech unicorns. However, there are other actors in the world that are always going to have more capital. I started thinking more recently about exit markets and our European companies. Do we have a good enough collaboration between companies that already have access to markets and the innovators growing? We used to have that in Sweden, where the Ericsson, being previous world leaders, would vacuum the market for innovation, that being very constructive. These multinationals now act on a global market and connection is not quite as clear. Across Europe we have amazing companies that could keep innovating and avoid being sclerotic and keep competitive by a stronger partnership with innovation. Venture capital and financing are a part of the solution. Perhaps there is a need for a stronger correlation between closing the funding gaps and contributing constructively to the industrial development.

Thanks a lot. That is a great point to digest and reflect on. It is perhaps a good moment as well to let our listeners to think about before our event. I would like to thank you very much, Vivi and Henrik, for all the insights that were shared today with us. It was a really stimulating conversation.

Vivi Papasouli: Thank you very much, Anna. A great saying, I experienced from the Northern and Southern borders of the EU, and I am looking forward to welcoming all of you in Athens. 

Henrik Storm Dyrssen: Thank you very much and really excited to see you guys and everyone else, and to learn from you in Athens.

A big thank you also to our listeners for tuning in today to this episode of the fi-compass Jam Sessions podcast. I certainly learned a lot today, I have a lot of food for thought, and I hope that this podcast was also helpful for you. Hopefully see you soon at the Fi Compass Workshop in Athens on the 26th 27th February, where both Vivi and Henrik will share even more insights, as speakers. For those who cannot make it, the slides from the event will be published after. May you have any questions, we encourage you to get in touch at fi-compass.eu. We look forward to hearing from you and until next time, goodbye.