Why Europe struggles to scale its deep-tech startups

European governments are committing large amounts of capital to boost regional deep-tech startups, but investors say a lack of late-stage capital and risk appetite are preventing more domestic deep-tech leaders.

Coined in 2014, the term "deep tech" refers to technology based on tangible engineering innovation or scientific advances with the ability to disrupt several industries. Examples include AI, quantum computing and robotics.

Europe is already renowned for scientific research, and in recent months governments across the region have announced significant plans to produce their own global deep-tech leaders. Among them are Germany, which launched a fund of up to €1 billion (about $1.1 billion) to invest in deep tech and climate tech, and the UK, which has pledged £2.5 billion (about $3.1 billion) for quantum technologies.

To be sure, Europe has produced plenty of deep-tech startups, including robotics company Exotec and battery maker unicorn Northvolt. But compared to North America, Europe still faces some unique challenges when creating its deep-tech leaders.

"There's a huge problem [with scaling deep-tech startups] in Europe," Massimo Portincaso, founder and managing partner of Deepwave Ventures, said. "For anyone wanting to raise above €10 million, it's hugely problematic, and I think that certain parts of Europe and some institutions are a little bit delusional thinking that everything is fine."

Portincaso cited a lack of venture capital for deep tech in Europe as a key reason why these startups find it difficult to scale. Taking AI and machine learning as an example, venture firms invested roughly €38 billion into US-based startups last year, while European companies raised only €10 billion, according to PitchBook data.
The US VC market in general is significantly larger than that of Europe, so naturally funding for deep tech will reflect that gap. However, according to OpenOcean general partner Ekaterina Almasque, the difference is not just in size but in culture.

"There is still a bit of a cultural bias in Europe where there is a reluctance at the early stages for the European VC industry to invest in startups without revenue," Almasque said. "I think in Europe the [VC firms] are more risk averse but so are the corporations who are potential customers."

Almasque has observed more VCs move into deep-tech investing, but deal sizes remain small. As opposed to a SaaS or ecommerce company, deep tech requires significantly more capital and time to produce a product due to the complex nature of the technology, which may present too much of a risk for a generalist investor.

Even European funds that are specialists are typically small in size and therefore unable to provide the levels of capital needed for deep-tech startups to grow. As a consequence of investors and LPs being more risk averse, many European deep-tech startups, like Romania-founded UiPath, are moving to the US in order to scale.

"Currently, the signs are pointing to the US [as being a more attractive place to scale]," said Manjari Chandran-Ramesh, a partner at Amadeus Capital Partners. "Often the US market is much larger for customers, there are more investors willing to lead at the Series B stage and the big acquirers are also in the US. The Nasdaq is also more attractive for listings so all of these things are factors for startups to consider moving. [Europe] is catching up but it will take time."

To an individual startup, being based in Europe or the US may not matter so much, but not having these companies is a disadvantage to Europe's deep-tech ecosystem in the long term.

According to Almasque, many founders and employees of deep-tech startups go on to build other companies or act as mentors to newer startups. If these founders and operators move abroad, then European deep-tech founders won't have as much access to the knowledge and resources that their predecessors can offer in order to grow.

There are also national security implications for European countries if domestic deep-tech startups move to the US; research and development efforts could lead to the creation of critical new technologies that have significant strategic value, particularly in areas relating to encryption or cybersecurity. If these technologies are moved outside of Europe, it could limit the influence of European countries in security-sensitive sectors.

Public funding from European governments will help, according to Portincaso, but more private market investment, as well as simplifying bureaucracy, is what is needed to scale the deep-tech ecosystem.

"Defragmenting Europe's deep-tech market is going to be really important in driving scale," Portincaso said. "Institutions like the [European Investment Fund] are doing a great job helping to build venture funds, but we're missing the risk appetite from LPs to unlock the capital that is needed. Government funding is necessary but not sufficient."

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