Deep tech is an umbrella term for technologies that do not focus on end-user services and include AI, blockchain, robotics, biotech, etc. Surprisingly, it has existed as an investment category since the tech industry was first established. However, its favourability amongst investors is dependent on the climate of the moment. When mainstream technology is at the forefront of the culture, then the more low-profile deep tech investment opportunities are overshadowed and seem too obscure.
The big winners in tech have been well-known companies like Google, Amazon, and Facebook. However, as other areas of tech grow in popularity, there is an ever-widening window for start-ups. Many offer more niche capabilities, can solve difficult problems, and have the potential to effect meaningful change.
In recent years, though, it has been thought that Europe has a problem with deep tech start-ups. Some professionals in the field—namely members of the European Innovation Council (EIC)—argue that this is not the case and instead, it is a scaling problem.
The European Commission has provided the EIC with €10 billion to support innovation in Europe. This includes start-ups. In their ScalingUp initiatives, the EIC surveyed investors and founders within the European deep tech space to investigate what is causing the scaling problems and why European companies are unable to keep up with their American and Asian competitors. In doing so, they found four main issues.
Scaling is an essential part of prosperity and longevity. A recent McKinsey report found that Europe could lose trillions of added value by 2040 if it continues to lag on deep tech growth. One member of the EIC therefore recommends scale-ups worry less about perfecting their technology and put more of a focus on their marketing efforts. Simpler pitches are often more compelling to investors and others within the industry and can help accelerate the scaling up.
European deep techs are not paying enough attention to the quality of their boards. If non-executive directors are not considered, then start-ups may be held back because they are not getting the expertise that external experts offer. This also reduces the number of investors that will be alerted about the exciting deep tech opportunities. Without a proper board of directors, the long-term goals of the company can become clouded.
3. Lead investors
Europe is lacking lead investors in the backing of deep techs. Potential investors are consistently looking for other investors to take the lead. The capital structure of this particular market is what complicates this further. If a company requires investments in hardware and physical infrastructures, it becomes increasingly difficult to finance the project. It is challenging to find an investor that can spend the amount of money that is required, which in turn makes it hard for founders to close a round. While the EIC can match tickets of up to about €15 million (soon to be €50 million), it cannot take on the lead role.
Some investors say that the most significant problem European innovation faces is corporates. Deep tech sales are typically business-to-business (B2B). Corporates are the largest clients in the B2B realm. Start-ups can take a year to finalise the procurement process, which can make corporations unwilling to collaborate with deep tech scale-ups. They sometimes slow the process even further. Additionally, they must be willing to pay a hefty price for the innovation that comes out of scale-up projects. Otherwise, the deep tech will not succeed.
The EIC and deep tech
The EIC has committed to providing 30 European deep tech companies with a year’s worth of preparatory and CEO group sessions, customised assessment and roadshow plans, roadshows that will allow companies to network with people and organisations in the industry, and large-scale media coverage. The council faced a rocky start, but progress is expected to be made by the end of this month.
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