Europe’s Deeptech Funding Hampered by Lack Of Understanding

In the U.K. and across Europe as a whole, those with an interest in the creation and growth of deeptech startups are both excited and concerned.

The excitement comes from knowing that graduates from European universities are more than capable of leading the way when it comes to technologies such as AI, quantum computing, the multiverse and digital twins. And the trepidation? The road from university lab to successful product is long and hazardous. Staying on track usually requires a continuing flow of investment from seed (and pre-seed) to the various growth stages. Keeping the investment flowing is a priority not just for startup founders but also for policymakers.

So how’s that going? Well, a new report published last week by Digital Catapult finds that while money is still flowing into European deeptech, factors such as a lack of knowledge on the part of VCs and skills shortages are putting restraints on the flow of funds.

Digital Catapult styles itself as the “U.K. authority on advanced digital technology.” In practical terms, it works not only with startup and scaleup founders but also with large organizations to find new ways of addressing industry challenges. Its services include consultancy on digital technology, innovation and acceleration programs and the provision of testbed facilities.

VC Attitudes

As CEO, Jeremy Silver explains, the latest European Investor Attitude Tracker report is intended to take the temperature of VC and angel thinking in the U.K. and mainland Europe, with a particular focus on deeptech.

“Over the past ten years, the U.K. has been the biggest recipient of equity investment. We wanted to see what it looked like this year,” he says.

To that end, the report has drawn data from 1,250 early-stage investors in Britain, France, Germany, the Netherlands and Spain. And although the primary purpose of the study is to ascertain the United Kingdom’s competitive positioning among European startup and deeptech ecosystems, there’s a lot of useful data on the investment climate across the wider continent.

But let’s start with the prospects for the British ecosystem. The report finds that 25 percent of investors regard the U.K. as the deeptech epicenter of Europe. On that measure, Britain tops the investor attitude table but it’s not a slam dunk. Stepping back to look at the bigger picture, Germany and France are close behind, with scores of 24 and 23 percent respectively.

And actual levels of investment in startups have been falling. “Economic headwinds are having an impact,” says Silver. We are probably seeing a 30 percent drop at least.”

There is some nuance here. As Silver points out, valuations of later-stage companies have been falling, whereas early-stage businesses have proved more resilient. Against this backdrop, risk appetite has been changing.

Risk Appetite Reassessed

The report finds that on the European mainland, 69 percent of investors have reassessed their risk appetite and in the U.K. the figure is even higher at 75 percent.

It’s not all one way traffic, however. While 60 percent have set their risk appetite lower just under a third of investors (30 percent) have raised it.

That’s probably because some investors are looking at the potential of technologies that may take longer to develop (for markets and use cases not yet be defined) but which nonetheless hold out the prospect of massive returns.

A.I. is a case in point,” says Silver. “There is a sense that we are at the beginning of something, so it is worth investing.”

Lack of Knowledge

The question is, will there be enough investors willing to take a chance on startups offering emerging technologies? When asked about the risks associated with deeptech investment, 31 percent of respondents cited a lack of knowledge.

That’s probably not surprising. Many investors are generalists and while it’s perhaps relatively easy to look at, say, fintech, and understand both the technologies and the market opportunities, the role that deeptech will play in the future is still being worked out. To be honest, who can really say with certainty where the use-case for multiverse technology will be in ten years time? Equally, the various technologies that exist under the AI umbrella, are as yet only having a fraction of the expected impact. We are still in the foothills.

In other words, it’s a tough call for generalist investors. “People who are not close to it may struggle to understand,” says Silver.

So there’s a challenge. “We want to see a high level of private investment,” says Silver. “But we struggle with that in the U.K. and Europe.”

The Role Of Public Money

There is public money available in the form of grants or funding linked to taking part in challenges. This can be an opportunity for startups to plug the gaps in their funding. But there is a downside to grant money. For instance, a startup may be tempted to join a challenge – creating a solution for a specified problem – simply to access public money. The danger is that pivoting towards the challenge will knock the business off course.

Silver urges startups to retain their focus.“Unless a challenge aligns with a startups product route they shouldn’t apply for it,” he says.

Money is not the only challenge. Skills remain a problem and arguably this is particularly true in the U.K. as there is no longer free movement of people from Europe, post Brexit.

One way to address the skills shortage is to encourage more diversity in the tech industry. At one level that means encouraging a wider group of people to acquire advanced tech skills. Equally though, the report finds there is still a bias – probably unconscious – among VCs with women and minority groups still less likely to receive funding.

All this feeds into the challenges facing the evolving deeptech startup sector in Britain and mainland Europe. Nevertheless, the investor interest is clearly there.