Europe Prioritises Deep Tech But Funding Startups Is a challenge

The European Union has prioritized the creation of a vibrant deeptech ecosystem but for startups working in the field, raising capital can be a problem.

Who would turn down the opportunity to invest in a deeptech startup? After all, companies working in the so-called deep technology sector are applying potentially game-changing science to solve some of the most intractable problems facing a whole swathe of industries. So, you would expect VCs and other investors to be knocking vigorously on the deeptech door. It’s the future after all.

Well up to a point. Speaking at a European Institute of Innovation and Technology (EIT) conference earlier this month, deeptech investor Daniel Carew posited an inconvenient truth. “Every investor is hesitant to invest much in deeptech,” he said. “Because every investor is looking for a great return at low risk.”

And when it comes to the promise of a return, companies operating in this field don’t always inspire confidence. For one thing – and we could be talking here about AI, quantum computing, robotics or biological science – much of the work that could be characterized as deeptech is at an extremely early stage. Indeed, some of it won’t have made it beyond the four walls of a university lab. And when companies are spun out, they may still be developing technologies that have yet to be harnessed to particular use cases or verticals. Consequently, the return on any investment might be years away. To take just one example. The widespread adoption of quantum computing could be a decade down the line and no one knows exactly how it will be deployed.

So, how can you encourage more investment? That was one of the questions discussed at EIT’s Grow Digital 23 conference in Brussels last week, an event co-sponsored by the European Union.

Research Into Product

And here’s the question. We all know that Europe sags under the weight of top-class universities and research institutes. But when those institutions spawn spin-outs and startups, will they be able to raise the capital necessary to turn research into product?

With the conference still in full swing, I sat down with Diva Tommei, Chief of Innovation and Education at EIT to discuss how the problem could be addressed.

Tommei defines deep tech in terms of a paradigm shift. “It’s using technology to drive shifts in the paradigm that will impact for the benefit of society,” she says.

That sounds like a splendid aspiration, but as Tommei acknowledges, VCs will have a different perspective. They will be looking at early-stage research and considering the possibility of a return in maybe ten years’ time. And that’s perhaps where the field narrows in terms of financiers capable of assessing untried technologies. “Not everyone can invest in deep tech. There is a lot that goes into the evaluation of a deep tech opportunity. Not everyone has the tools to do that,” says Tommei.

The Vision Thing

In the world of deep tech the use case for the technology might not be apparent. Tommei stresses the importance of startups being able to communicate the opportunities. “Startups have a vision. A startup needs to have a vision for the future of the world. That’s what sells an investor and that is especially true with deep tech.”

Indeed, the vision of the startup founder may be one of the few things that investors have to go on. With deep tech, their usual toolkits for assessing businesses may apply, simply because commercialisation is so far off.

So where do the potential funding bottlenecks occur? “Well, like all startups it’s at the early stage. But with deep tech, the early stage gets prolonged sometimes as far as Series B,” says Tommei. “A deep tech company can get to Series B without a customer.” So investors are focusing on the technology and the team rather than market feedback.

And there is another issue. Such is the nature of deep tech that the technology you invest in today may be superseded by another one that you’re asked to invest in tomorrow and each will have their own long timelines to market.

European investors in particular aren’t necessarily comfortable with this kind of risk and that has created opportunities for VCs from further afield.

“ $17.7 billion was invested in European startups and scaleups in 2022 but 50% was coming up from the US and Asia in the later stages. That means Europe has become good enough to attract investment in the early stages but we haven’t built an infrastructure to support startups in their growth. So there has been a gap for US and Investors to join in,” says Tommei.

Losing Talent

But does that matter as long as capital is finding its way to scaleups?

“When an investor comes in and provides a bucket of money there is an expectation that the company will move. So we see our brilliant brains and our brilliant technologies going somewhere else. So let’s build the infrastructure that enables companies to stay in Europe,” Tommei says.

Derisking Investment

So what can be done? Well, you create an environment that encourages investors to take a chance on deeptech. Or to put it another way, you can derisk the investment. “That’s where national governments come in and also bodies like EIT,” says Tommei.

That can partly be done through grants and loans but it doesn’t stop there. Tommei cites the venture-building work done by EIT. For instance, the organization runs programs to encourage researchers to adopt an entrepreneurial approach, a process that includes introducing them to mentors and ultimately investors as they begin to take their research to the market.

EIT also matches startups with corporations to take part in challenges aimed at applying technology to solve the problems of established businesses. All this is pretty much central to the organization’s E.U.-mandated job of helping to create a Europe-wide innovation ecosystem. But are the large corporations playing their part?

“We have big corporations that are already considering the long-term paradigm shifts we were speaking of. These are the companies that want to speak to startups in order to stay updated. They want to future proof themselves, so they talk to startups.” Tommei says more and more corporate businesses are becoming involved with the EIT open innovation programmes.

Finding investors who see the big picture – or perhaps the long view – can also be a way forward. For instance, Jan Goetz, CEO and co-founder of IQM Quantum Computers, a company that has raised $180 million, told the conference that family offices can be a good source of funding.

According to figures shared at the conference, around a quarter of European startups are now in deep tech and the sector is valued at €700 billion. That’s all good, but at the level of Brussels policymakers, there is a real concern that the continent (and not just the EU itself) could miss out on fully exploiting the potential of the new technologies while businesses in the U.S. and Asia make hay. Work goes on to create a supportive ecosystem. It’s work in progress.