This article is part of our special report The promises and challenges of repayable EU structural funds.
Equity projects remain an under-explored form of EU financing to jump-start innovation in developing capital markets, but Fil Rouge Capital, a Croatian project, shows they can be a fruitful avenue to stimulate the domestic business ecosystem while raising the country’s profile internationally.
“The upside when you’re doing something new is that you’re trailblazing, you create your own groove on Earth,” said Julien Coustaury, founding partner at Fil Rouge Capital, Croatia’s first venture capital fund.
“By being the first, the downside is that you face a lot of difficulties,” he adds.
Coustaury, who said he used to be French but now is a ‘Balkan boy’ complained that the nascent investment scene in the newest EU member makes it difficult to attract big institutional investors.
Fil Rouge’s investment put a big emphasis on tech start-ups, with ambitions to become the “Sequoia of central and eastern Europe,” referring to the venture capital giant that has since 1972 backed companies like Apple, Google and GitHub.
Through cohesion funds implemented by the European Investment Fund (EIF), Croatia invested €32.5 million to establish the venture capital firm, with an additional €2 million put up by the country’s national development bank HBOR, while Fil Rouge was able to raise an additional €14 million from private investors.
The fund will look to invest for the next five years and then spend the following five years “harvesting,” that is, focus on growing the investments and eventually selling its stake in the invested companies.
Besides Croatia, in recent years, the EIF has helped set up similar equity projects in Czechia and Greece by using EU cohesion funds, with a total volume of structural investments close to €343 million.
However, this number is dwarfed by the total €16.2 billion of cohesion funds committed to loans and guarantees by 2018 from the 2014-2020 budget period.
The preference to use loans and guarantees to equity investments is partially explained by the technical difficulty of setting up such funds, underdeveloped markets in many countries and smaller total investment volume with higher management costs, which make venture capital funds politically less palatable in Brussels.
Nevertheless, proponents of risk capital argue that investing in early stage companies can create a virtuous circle that ultimately attracts more investments in the future.
“I’m human and I have no problems to ‘give back’ but at the end of the day, it’s fair to say that we do have an interest in creating an ecosystem, because our interest is to get more funding opportunities to become more selective, fund the best start-ups and eventually bring superior returns to our investors,” Coustaury said.
“I know that people in the VC [venture capital] world are shy to talk about returns. I’m not,” he said.
“If I provide returns to my investors, they’re going to be certainly very keen to invest in the next fund, which means I create a virtuous circle, which benefits the community and the ecosystem directly, and that’s my way of giving back,” he added.
Fil Rouge, which started operations a year and a half ago, has set up a ‘Startup School’ to help entrepreneurs with ideas reach investment-readiness, and has since helped prepare and accelerate 61 projects with an average investment of €46,000 for a total value of €2.8 million.
As of November, it has screened a total 1323 applications and invested €10.7 million into 27 companies, averaging €400,000 per enterprise.
“I have a strong belief that talent is equally spread,” Coustaury told EURACTIV.
What Croatia has “lacked so far is money and what we intend to be at Fil Rouge is this vehicle that will enable and foster a new generation of young entrepreneur that will become the unicorns of tomorrow,” he added.
There are encouraging signs. Croatian telecommunications company Infobip revenue of €602 million last year, while electric sports cars manufacturer Rimac saw revenues rise to €10.8 million in 2018.
According to Coustaury, the rise of their first big companies is also important for “marketing.”
“It puts us on the map and it also gives all those guys in London a blessing to say “but yeah, that’s true, a unicorn can also come from that region.'”
[Edited by Benjamin Fox]