At the start of 2014, the European Commission launched its SME Instrument, providing funding of €2.8bn over seven years to accelerate the development of innovative products and services with a two to three-year horizon to market. Stephan Decher explains what it is about and how to access the funds.
The vast majority of SMEs (around 70%) rarely embark on research and development activities, and lack the resources and expertise to do so, according to a recent assessment by the EU. A further 20% engage only in limited innovation activities, such as adapting existing technologies. This leaves a minority of around 200,000 SMEs that are heavily involved in more advanced research and innovation. But often, these SMEs face a funding gap, when substantial capital outlays are required to complete and launch a new solution on the market, before any cash is received from customers.
The European Commission (EC) is committed to giving innovative SMEs a better chance to compete. The aim of the SME Instrument, therefore, is to fill the gaps in funding for early-stage research and innovation (R&I) by SMEs. Projects will be selected through a bottom-up approach. They must be of clear interest and economic benefit to SMEs and have a strong European dimension. SMEs can form collaborations according to their needs, including for subcontracting.
The SME instrument comes in addition to any support provided through participation in collaborative projects continuing projects under Horizon 2020, as well as to other measures for SMEs, such as the Eurostar programme.
How does it work?
The SME instrument is run on an open call basis, with quarterly deadlines starting in summer 2014. It is structured in three phases covering different stages of the innovation cycle. The process of evaluating proposals is based on simple rules, in order to reduce the time to contract.
Phase 1 aims to cover the assessment of technical feasibility and the market potential of new ideas. Following submission of a 10-page initial business proposal, projects may be awarded a lump sum of µ50,000 ($70,000).
Phase 2 aims to cover R&I activities with a particular focus on demonstration activities – testing, prototype, scale-up studies, design, piloting innovative processes, products and services, validation, performance verification and so on – and market replication encouraging the involvement of end users or potential clients. Project funding may be up to µ2.5m and the typical duration should range from 12 to 24 months. Phase 2 applications can be submitted independently of phase 1 funding if a solid business case already exists. The chances of receiving R&I funding are independent of whether phase 1 has been conducted or not, but through phase 1 funding SMEs are giving themselves a better chance for a strong phase 2 business case. Phase 3 entails support measures in view of helping SMEs toward commercialising their innovative products and services, through measures like networking, training, coaching and mentoring, facilitating access to private capital or better interaction with key stakeholders. SMEs will not be funded directly under phase 3. Companies that have completed phase 2 should have validated innovations that are ready for market, marking them out as potential targets for subsequent private funding.Which topics are funded?
The SME Instrument specifies 11 calls that are formulated more broadly in scope than the collaborative calls of Horizon 2020, allowing a wide range of SMEs to apply.
- Space: Engaging SMEs in space research and development.
- Information and communications technology: Supporting SMEs in open disruptive ICT innovation.
- Materials and manufacturing: Accelerate the uptake of nanotechnologies, advanced materials or advanced manufacturing and processing technologies by SMEs.
- Diagnostics: Validating biomarkers and diagnostic medical devices.
- Food: Developing more resource-efficient and sus–tainable food production and processes.
- Blue growth: Supporting SMEs’ efforts with regards to innova-tive solutions for blue growth – sustainable maritime development.
- Low carbon: Stimulating the innovation poten-tial of SMEs for a low-carbon energy system.
- Transport: Facilitating business innovation research for transport.
- Eco-innovation: Boosting the potential of small businesses for eco-innovation and sustainable supply of raw materials.
- Security: Developing products or services for the protection of urban soft targets and urban critical infrastructure.
- Biotech: Moving to competitive and sustainable biotech-based industrial processes.
What does it take to get funding?
The EC estimates that about 5% to 10% of phase 1 proposals will receive the lump-sum funding, while about 30% to 50% of phase 2 applications might be successful. Actual probabilities will depend on the number of applications. For 2014, the commission has dedicated µ25m (10% of its budget) to phase 1 funding, to support 500 SMEs, and 88% of the budget is dedicated to phase 2 funding, allowing for 150 phase 2 grants to 2014 applicants.
Writing a proposal requires responding within a set template structure, similar to those required for collaborative projects, with two very significant differences.
1. Phase 1 applications are only 10 pages long, compared with 50-90 pages for collaborative projects.
2. The commercialisation potential and economic impact for the SME, together with its ability to execute on the project objectives, are the highest-weighted criteria in the evaluation, ahead of excellence in innovation and the European dimension, which dominate collaborative project assessments.
The EC has set up a remote evaluation process, eliminating a time-consuming consensus meeting in order to achieve a fast turnaround of around three months to funding for phase 1 applications and six months for phase 2 applications. On the downside, this method may lead to a degree of randomness in the process, as not all experts will be familiar with the subject matter at hand. Knowledge of the EC’s evaluation procedures is use-ful when drafting a proposal.
For successful funding, applicants should respect best practices in proposal writing, such as writing clearly and concisely, illustrating complex concepts through charts and tables, and mirroring the weighting of the evaluation in the writing.
Game-changer Innovative SMEs that want to grow cannot escape competitive international markets. The SME Instrument lets SMEs compete with the best in their class in the EU. They should relish the opportunity and start early to maximise their chances.
The role of public funding among funding instruments for innovative SMEs is often underestimated. First, SMEs often do not know about European funding schemes, even though they tend to be relatively generous. Second, public funding, particularly from EU programmes, has a reputation for being long-winded, cumbersome and time-consuming. While this is not just a myth, it is also true that applying for the right programme with a well-researched and well-written proposal will increase funding probabilities substantially and validate the innovation project.
Overall, the SME Instrument seems well-suited to tackling negative preconceptions and provide relevant funding faster to the best innovators. The EC has made an impressive effort in accommodating the needs of innovative SMEs in order to realise more growth for Europe from SME innovation – an agenda long overdue. SMEs should embrace the instrument and do their bit to make it a success.
Stephan Decher is a principal consultant with Zaz Ventures, a consultancy specialising in European innovation funding, with offices in Brussels, Stockholm, Zurich and London. Email Stephan.decher@zazventures.com or call +44 (0)7516116501