Cascade Funding as an Alternative Funding Source for Innovative Investments

Abstract

Although promoting an innovation ecosystem is a core priority of the European Commission (EC), evidence indicates that innovation within start-ups and Small and medium-sized enterprises (SMEs) is still constrained by the lack of funding opportunities. Consequently, their capability to realise proofs of concepts or launch new risky business lines is limited. This paper aims to comparatively assess cascade funding initiatives against more traditional funding approaches as relevant alternatives for financing innovation. SMEs and start-ups most commonly fund innovative projects through business angels or venture capital. The disadvantages of risk capital include complex administrative procedures, loss of ownership and control over the strategic decision, etc. Other relevant funding is commonly sourced from private bank loans. In addition to discouraging bureaucracy, prior guarantee or collateral required, longer timing and extended terms, these investors are often reluctant to fund innovation due to their high risk. Preference is usually given to safer investments in which assets can be easily valued and sold in case of failure. In addition, financing opportunities from banks do not include an assessment of the return opportunities of innovative businesses. Out of the traditional schemes for financing innovation, cascade funding is a promising alternative, especially in highly innovative sectors. Cascade funding provides small grants issued by the beneficiaries of projects funded by the EC, typically under the Horizon 2020 (H2020) framework (>800 M€ allocated since 2014). As the EC delegates the selection and monitoring of innovative projects to consortiums, the funding is provided via open calls for proposals, which can provide start-ups and SMEs with grants for an experiment between €50,000 and €150,000. This mechanism also enables applicants to benefit from the technical and/or business expertise of leading European enterprises, universities and technology centres. While focusing on exploitable innovation, cascade funding has also proven to be a more agile financing method with respect to the classical ones. Here, DigiFed project is analysed as a Case Study for cascade funding, as it came to allocate over €3M via three open calls for proposals since 2020. Evidence of the advantages of this funding source for innovative businesses with respect to risk capital and bank debt is the core output of this paper.