A major goal of business-related projects is to be profitable for the respective entity(-ies) that will bring it to the market. The same applies for the EU projects under the Horizon Europe programme (as well as the former Horizon 2020). Saying that, a solid and well-studied business plan is the key to reach this point. It is exactly this go-to-market strategy that the evaluators would like to see in the Impact Section, among other criteria, of your Horizon Europe proposal to approve the project for EU funding. In this article, we will try to break down the various segments of a business plan, which will lead to the final output of such a financial analysis; the profit and loss statement (P&L).
How can we present a P&L analysis when we have not finalized the technical development yet?
Before we move into business and financial details, we need to brainstorm on this very simple, but very rational question. It is true that the need to include a business plan and a P&L statement significantly depends on the specific programme the applicant(s) will apply to and ask for EU funding. Is it also connected to the minimum required Technological Readiness Level (TRL).
In Horizon programmes, such as FET (Future and Emerging Technologies) where the starting TRL is from 1 to 3, it is quite obvious that as the technology has not even reached the prototype stage, projecting profits and losses that will take place even five years later is quite challenging. On contrary, for programmes such as the EIC Accelerator or the former FTI (Fast-Track-to-Innovation) where the applicants need to start from a TRL5-6 (prototype developed and demonstrated at least at a relevant environment), a well formed business plan, even preliminary, is crucial to include in the final proposal application. In programmes, like Thematic Priorities or the very recent Green Deal where the technology needs to start from a TRL4, such a financial analysis is a nice-to-have asset.
Proposal Tip: Always try to include a preliminary go-to-market strategy. This will demonstrate that the applying entities are not focusing only on the technological development but they have already started working on the commercial impact of the project and its potential contribution to the companies’ scale-up(s). In any case, a preliminary business plan presented in an EU proposal is not committing and the evaluators are aware that this will be updated and adapted during the project’s execution.
Key points of a business plan for your Horizon Europe proposal
To be able to provide a P&L statement, the applicants need to first present all the necessary stages of the business plan that will potentially lead to sales, revenues, and profits. The most important ones are:
After defining who will be your potential customers, it is very important to define via which routes you will reach them. Although, this is highly dependent on the nature of each company and project try to be as clear as possible regarding the model that will be followed, namely:
- Direct sales: this is a quite common practise for targeting customers at a local level (national, adjacent countries) and with customers that you have already established commercial relationships e.g. for other business activities. Direct sales are also quite common for big enterprises that have an established pan-European or global commercial network
- Distribution network: smaller companies and SMEs usually follow this path aiming to expand in new markets (e.g. new regions and territories) where they have no contacts. In this case, a basic commission plan is good to be included
- Licensing: this is another way to reach multiple markets, via receiving a royalty for allowing third parties to commercially use your final offering. Nevertheless, the protection of the innovation (patent, copyright, trademark, trade secret) is a key asset to guarantee the protection of the intellectual property of the applicants
It is not necessary to follow only one of the aforementioned routes. A successful business model shall study each commercial opportunity and create specific multi-strategies, if necessary.
Another very important part is the revenue model, namely the final market price of the project’s output. A preliminary pricing strategy is important to be presented in the proposal, as this (i) quite often constitutes a key differentiation point with the state-of-the-art solutions, that already exist in the market. To enhance the potential pricing advantage of your solution, you can include a brief but solid cost-benefit analysis with the dominant competing technology in the respective market; (ii) will lead to and justify the P&L statement.
Try to include as many information as possible regarding the pricing strategy, such as production costs, margin, potential commission to distributors, what the final selling price does include (e.g. technical support, installation, maintenance, etc.), as well as a potential evolution of the price in the next years after commercialization. The latter is important as it shows to the evaluators that the applicant(s) understand the market and aim to strengthen their position in it. For instance, it is quite common to start in Y1 of commercialization with a higher price that can become more competitive during the next years once the clientele and the production capacity (for physical final products) increase.
It is also important to demonstrate the value chain of your final product (especially regarding physical products). Disclosing names of your partners/suppliers and brief justification for the major ones will add value in the proposal. Although, it is quite common that the applicants have not decided the final supplier of a specific material, you can provide a list of potential suppliers you are considering collaborating with.
Proposal tip: Create a nice supply chain graph to replace bulk texts, adding arrows to show the transition from the first steps of development and production up to the moment it will reach the final customer. Add visual elements always helps the proposal, and a value chain graph is a great opportunity to have one.
Profit & Loss Statement
As mentioned above, the P&L demonstrates the commercial vision of the applicants and the expected business impact of the project. The more detailed the P&L the better, even though the evaluators know that these projections are quite preliminary (especially in low TRL or in big consortia projects). Nevertheless, a first financial forecast, at least of the key industrial members of each consortia always gives value to the applications.
The best way to present the P&L is through a table (in case that the applicants have a very extensive P&L statement, then you can include it in the Annex sections and extract the key information in the actual proposal), split in:
- Rows that can consist of sales volume (in units, kgr, m2 – depending on the final product), revenues, costs and EBITDA (in euros) and the final return on investment (ROI). These are the basic information to be included, although any additional data such as detailed costs (e.g. personnel, direct/indirect costs) are more than welcome.
- Columns, one per year after the end of the project. Although there is not a specific requirement from the EC template regarding the number of years, a 5-year projection period is the common practise. The reason is that 5 years is a period that the innovation shall prove its market potential, resulting not only in a full payback of the initial investment but also in a promising ROI. Nevertheless, in projects with non-physical final product (e.g. a mobile application), the market entrance shall be more rapid. This is mainly because of the nature of these products, as the development and innovation move at a much faster pace; thus, it is important to penetrate the market as fast as possible not to lose the first-mover advantage.
Proposal tip: A satisfactory payback time is within 2 to 3 years after the end of the project, whilst a promising ROI can be anything more than 4 or 5 at Y5 after commercialization.
But, how do we calculate the ROI?
The official ROI equation is the following: ROI = (Cumulative profit – Investment) / Investment where cumulative profit is the EBITDA from Y1 after the end of the project and the Investment is the total funds used (including investment to reach the current stage of development before the EU grant, the EU grant itself and the own contribution of the applicants, if applicable). Yet, to present an even more impressive ROI, you can skip the investment made by the applicants before the start of the project and focus only on the EU project itself.
Furthermore, although not financially relevant, the applicants need to consider the growth of their teams during and after the project. As such, an estimation of the new jobs that will be created (i) during the EU project; and (ii) for the forecast period after its end are good to be included in the proposal, as well as a brief description of the nature of these jobs (e.g. R&D, production, technician, administrative, sales & marketing)
With the basic highlights above regarding presenting a detailed business plan in your Horizon Europe, we believe that you have the core basis to set up a solid commercialization plan to attract the attention of the evaluators.
This article is written by Panos Antonopoulos, Innovation Consultant