As the negative effects of Covid-19 on the global economy continue to exacerbate, businesses are in unprecedented need of financial support. The Bulgarian Fund of Funds is introducing more crisis measures for economic recovery as on 13th October 2020, it announced that it is providing additional funding of €21.5m for liquidity support to SMEs and startups.
Managing near €1.2b, the pooled governmental fund, which is co-financed by the European Investment Fund and invests in other funds, is supposed to combine EU and national efforts to help SMEs and startups rebuild the economy. Currently, four Bulgarian venture capital funds are the current beneficiaries of the Fund of Funds – the early-stage funds Vitosha Venture Partners and Innovation Capital Fund, and the VC funds New Vision 3 and Morningside Hill.
The story in brief: Where does the money come from?
In May 2020 the Fund eased its conditions for equity instruments by allowing the selected fund managers to invest up to €800k in a single company without a private co-investor. A couple of months later, in July 2020, it redirected some €29m to the startup ecosystem as a measure to support companies in light of the expected recession.
The additional financing, however, was initially intended for the structuring of a Technological Transfer Fund – a strategic instrument that was designed to close the gap between science and business, commercialization and internationalization, R&D, and promotion of innovation. When the public tender for the establishment of the Transfer Fund was cancelled on July 6th, two Bulgarian business associations – The Bulgarian Startup Association (BESCO) and The Bulgarian Venture Capital Association (BVCA), expressed their concerns that the redistribution of the €29m to three already existing funds was not solving an issue and indicated that it will result in 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,” commented Evgeni Angelov from BVCA.
How can SMEs access the anti-crisis financing?
The €21.5m funds will be allocated to three investment funds – Innovation Capital Fund, Vitosha Venture Partners Fund, and Morningside Hill, under favorable conditions and without the need to raise any additional private capital outside the fund manager’s participation. The pre-seed Innovation Capital Fund will receive €5m, which will increase its cumulative resources to a total of €20m, while Vitosha Venture Partners will add another €6.5m to its funds, increasing the full amount of available capital to €25m. These two funds invest up to €50k in startups in the early acceleration stage and up to €1m in companies in the early stage of development. The third fund – the risk VC Morningside Hill, which invests up to €3.5m in early-stage startups and advanced high-risk companies, added €9m to its already available resources and now manages a total of €34m.
The fourth financial intermediary – the New Vision 3 venture capital fund is also expected to sign an agreement with the Fund of Funds for the channeling of an additional €6.5m towards its managed resources. This means that after the transfer its funds will amount to €28m – around €1m per company at an early stage of development.
Public & Private support: How does the fund operate?
The Fund uses a variety of financial instruments to improve SMEs’ access to private and public resources. It serves as an alternative to EU unconditional grant financing as it targets the strategic financing of projects, which are more self-sustaining and have better potential to accelerate economic development. The way the Fund allocates its resources is by selecting financial intermediaries such as banks, funds, and credit institutions to which it entrusts the task to mobilize additional private capital.
At the beginning of the Covid-19 crisis, the Fund introduced a loan guarantee instrument for local SMEs amounting to €78m the financing for which was provided by the EU operational program Innovations and Competitiveness 2014-2020. Earlier in October 2020, the Fund of Funds and the Bulgarian Bank for Development announced that they will continue providing anti-crisis support for SMEs. “The financial instruments give opportunities to businesses to stay sustainable and competitive on the markets they operate – they don’t provide private businesses with fish but rather give them a fishing rod,” explains Vladimir Danailov, the CEO of The Fund of Funds. According to him, during the past year, the fund has mobilized around €75m public resources but because of the Covid-19 situation only during the past month of September, there were an additional €28m public funds deployed.