The governmentally backed Fund of Funds (FoF) has just announced it’s redirecting €29M (56.3M BGN) to the startup ecosystem as a measure to support companies during the economic crisis and the expected recession. The additional funding was supposed to be used for the structuring of a Technological Transfer Fund. Given the circumstances, however, the public tender was canceled, and the funding will be channeled to pre-seed, seed and early growth companies through the three early-stage funds – New Vision 3, Innovation Capital, and Vitosha Venture Partners, and the VC fund Morningside Hill, which have just started investing and where the FoF is the major LP.
“The whole idea is to use the already existing channels – the funds that have just been launched, so the funding can reach the business as soon as possible as the companies are already experiencing difficulties,” tells us the new CEO of the Fund of Funds Vladimir Danailov, adding that the World Economic Forum continues warning of a deep recession. Last week, FoF announced additional €80M support for SMEs in the form of loan guarantees. According to Danailov, the negotiations with the three VCs are starting now, and the goal is to have clarity in the next several weeks. Since May and until December, after official approval by the European Commission, these funds are allowed to invest 100% public capital in startups (up to €800K per deal) a.k.a without the need for private co-investors and at low risk. This is also part of the crisis measures pack.
BESCO, the Bulgarian Startup Association, and BVCA, the Bulgarian Association for Private Equity and Venture Capital, are not convinced that this is the most suitable next step to support the local startup ecosystem.
Tactics eat Strategy: Where are the €29M coming from?
“I don’t think this solves a problem. On the one hand, this capital was supposed to be used for a strategic instrument – the Fund for Technology Transfer and it will be now used for a tactical move,” comments Dobromir Ivanov from BESCO. In May, BESCO, together with several ecosystems, sent an open letter to the government asking for financial support for the ecosystem in the form of a debt instrument that would be accessible for all the active investment funds in Bulgaria and used in case one of them needs to support portfolio companies. With the current setup, the additional capital is accessible only to three funds.
The Fund for Technology Transfer with a size of 58.7M BGN was designed to bridge the gap between science and business, commercialization and internationalization, R&D, promotion of innovation. In other words, the fund was supposed to support the research and development activities of enterprises, SMEs and startups, improve the cooperation between the business and research organizations, and commercialization of innovations. The public tender for the fund was launched in 2019. It was the most challenging procedure as there hasn’t been a precedent for such an investment vehicle in Bulgaria. In December, there were six applicants who wanted to manage the fund. Without further protocols on the development of this procedure, on July 6th, it was canceled.
Potentially missed opportunities
“It’s disappointing that there won’t be a Fund for Technology Transfer but additional capital for early-stage investors instead. There’s enough capital in this segment right now. This additional funding could even create a challenge as they would have to close even more deals in a short time and I’m not sure whether there’s enough pipeline,” comments Evgeni Angelov from the Bulgarian Venture Capital Association. New Vision 3, Innovation Capital, Vitosha Venture Partners, and Morningside Hill have the mandate to deploy a bit over €97M (190M BGN), €76M of which are public resources, to nearly 400 companies in the next 3.5 years.
“What we really need to invest in as an ecosystem is technology transfer and deeptech. This is the logical next step to develop as an ecosystem and be able to eventually produce unicorn companies,” adds Dobromir Ivanov. Given the tickets and the focus of Vitosha and Innovation Capital funds, such investments would rather be exceptions.
Furthermore, it is not clear which fund will be able to receive what portion of this fresh capital and for what types of investments (pre-seed, seed, early growth size of tickets, etc.). Increasing the capital and investment capacity means that the general partners will also have to put additional own capital to match the self-participation criteria. The negotiations with the three funds will start asap with the goal to have results in several weeks when the concrete parameters will be announced, told us the CEO of the governmental Fund of Funds.