Europe’s most promising firms are losing funding battles they should be winning. Eight member states want to fix the state-aid rules that class thriving deep-tech start-ups as “companies in difficulty” and cut them off from public support as a result.
The problem lies in how the EU defines financial distress. Under current state-aid rules, companies classified as “undertakings in difficulty” are barred from receiving public support. For many deep-tech start-ups, that classification is a trap, not a description of reality.
The eight countries — Netherlands, Czechia, Germany, Latvia, Luxembourg, Poland, Slovakia and Spain — are pressing the Commission to revise rules they say are unintentionally blocking innovative firms from grants, guarantees and public investment schemes.
The ‘undertaking in difficulty’ trap
At the centre of the matter is the EU’s definition of an “undertaking in difficulty” (UID). Under current state-aid rules, companies deemed to be in financial distress are generally barred from receiving public support in order to prevent governments from artificially keeping failing firms afloat.
The eight countries argue that the definition is outdated. Many start-ups, particularly in deep-tech, rely on subordinated loans, convertible loans and other quasi-equity instruments. These strengthen a company’s financial position. But the current rules do not fully recognise them. Viable, growing firms can therefore end up classified as “undertakings in difficulty” simply because of how they are financed.
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The problem is particularly acute for strategic technologies. Deep-tech firms often spend years on research before generating revenue. Development cycles of eight to 20 years are common in semiconductors, artificial intelligence, clean energy, life sciences and advanced chemistry. Temporary losses during this phase are normal. They are not evidence that a company is failing.
Undermining competitiveness
The current rules exclude precisely the firms the EU says it wants to support. In a joint statement, the eight countries argue that outdated eligibility criteria are undermining European competitiveness, discouraging private investment and slowing progress on strategic autonomy and technological leadership.
The eight governments propose two fixes. First, quasi-equity financing should count as part of a company’s own funds when assessing UID status. Second, exemptions for start-ups and scale-ups should be expanded, including extending state-aid eligibility to companies up to 15 years after their creation.
Detrimental consequences
Dutch Economic Affairs Minister Heleen Herbert says the current framework has “highly detrimental consequences”. It prevents innovative firms from accessing subsidies, guarantees and loans that are often essential during their growth phase.
Start-ups and scale-ups are indispensable for the transition to a sustainable economy. — Heleen Herbert, Minister of Economic Affairs, Netherlands
“Start-ups and scale-ups, with their new innovations and technologies, are indispensable for the transition to a sustainable economy and for reducing strategic dependencies,” Herbert said.
The proposal comes as Brussels searches for ways to close Europe’s innovation gap with the United States and China. The signatory countries note that the EU is promoting initiatives such as the STEP programme and Horizon Europe. Yet many innovative firms remain unable to access support because they fail the UID test.
Industry welcomes reform
The current definition was designed in the aftermath of the 2008 financial crisis to identify genuinely failing companies. It is poorly suited to today’s innovation economy. Deep-tech firms in semiconductors, artificial intelligence, clean technologies and life sciences can be excluded from public support despite strong investor backing and viable business models.
Dutch state-aid expert Melvin Könings described the situation as a “significant state-aid and innovation mess”. Writing on LinkedIn, he argued that the rules are “holding back some of the growth pearls” of the European economy.
EU ministers discussed the issue at a recent Competitiveness Council. The eight countries are now pressing the Commission for an interim solution. A broader revision of the rules is not expected until 2027. That, they warn, would leave innovative companies locked out of funding for several more years.
