The startups in Europe, with regard to the deep-tech sector, have witnessed tremendous growth over recent years. Deep-tech startups focus on technologies based on tangible engineering innovation or scientific advances, such as artificial intelligence (AI), quantum computing, and robotics. These startups have the potential to disrupt multiple industries and are vital for economic growth and innovation. Europe, a region known for its rich scientific research, has produced numerous deep-tech startups. However, these startups face unique challenges when scaling up compared to their North American counterparts. This post examines the reasons behind the struggle of startups in Europe to scale deep tech, using insights from three sources, and explores potential solutions to overcome these challenges.
Lack of Late-Stage Capital and Risk Appetite Among Investors
Europe struggles to scale deep tech due to limited late-stage capital and risk appetite among investors. Despite substantial government commitments, European deep tech lags behind the US, with a significant funding gap. For instance, US AI and machine learning startups received €38 billion in funding, while European counterparts secured only €10 billion last year.
Additionally, European venture capital firms and potential corporate customers tend to be more risk-averse compared to their US counterparts. Moreover, deal sizes in Europe remain modest, and many investors are reluctant to invest in startups without revenue at the early stages. Consequently, this cultural bias and risk aversion create challenges for deep-tech startups seeking funding and hinder their ability to scale.
Difficulty in Sharing a Compelling Narrative
Deep-tech startups in Europe struggle to communicate their value to investors and the public due to a focus on perfecting technology over narrative. Founders’ scientific backgrounds contribute to this challenge. An unclear narrative and complex explanations can hurt growth opportunities and make it harder to secure additional funding. Communicating the value of the technology in a simple and engaging manner can help startups attract investors and customers, ultimately contributing to their growth and success.
Attracting and Retaining Deep-Tech Talent
Deep-tech startups face significant challenges in attracting and retaining the talent needed to scale their businesses. Moreover, the tech industry is already experiencing a talent shortage, and deep tech is no exception. Scaling up requires talent with both technical skills and business management skills. The European Commission has recognized the need to train more people in deep-tech disciplines and has committed to training one million people across Europe in the next three years. However, finding talent with the right skills and convincing them to join a startup can be time-consuming and challenging. Deep-tech startups often seek talented business and sales staff with related technological backgrounds, further narrowing their talent pool. Additionally, creating a talent roadmap and working with a dedicated talent partner can help deep-tech businesses attract the top talent needed for growth.
The Impact of Relocation to the United States
Many European deep-tech startups move to the US for larger markets, more investors, and better stock exchange options. However, this migration may harm Europe’s ecosystem. Founders and employees contribute to the ecosystem by building new companies and mentoring others. If they leave, access to valuable knowledge and resources diminishes. Additionally, relocating domestic deep tech startups may impact European countries’ national security as critical research and development move outside of Europe, reducing their influence in security-sensitive sectors.
Fragmented and Bureaucratic European Deep-Tech Market
The European deep-tech market is fragmented, and bureaucratic processes can hamper the growth of startups in the region. Institutions like the European Investment Fund are vital for venture funds, but there’s a lack of risk appetite among limited partners (LPs) to fund deep-tech startups. Public funding is a good start, but to scale the deep-tech ecosystem, more private investment and simplified bureaucracy are necessary.
Recommendations to Scale Startups in Europe
Encourage Private Investment and Risk-Taking
Encourage more private investment and risk-taking among investors and LPs to overcome the challenges faced by deep-tech startups in Europe. Governments and institutions can support this by providing incentives for private investment in deep tech and fostering a culture of risk-taking and innovation.
Develop a Clear and Compelling Narrative
Deep-tech startups must learn to develop a clear and compelling narrative that communicates the value of their technology in simple terms. This will help attract investors, customers, and talent, ultimately contributing to their growth and success.
Invest in Talent Development
European governments and institutions should invest in talent development by providing training and educational opportunities in deep-tech disciplines. This will help build a skilled workforce that can contribute to the growth of deep-tech startups in the region.
Foster a Supportive Ecosystem
Creating a supportive ecosystem for deep-tech startups in Europe can help them thrive and scale in the region. This includes providing access to resources, mentorship, and networks that can facilitate their growth. Governments and institutions foster the ecosystem by promoting collaboration, offering financial support, and creating a conducive regulatory environment for deep-tech startups.
Streamline Bureaucracy and Defragment the European Market
Efforts should be made to streamline bureaucracy and defragment the European deep-tech market. This will enable startups to access the capital and resources they need to scale more efficiently. Governments and institutions can contribute to this by simplifying regulatory processes and promoting cross-border collaboration among European countries.
Scaling deep-tech startups in Europe presents unique challenges that must be addressed to unlock their full potential. By encouraging private investment, risk-taking, talent development, and collaboration, Europe can overcome these challenges and foster a thriving deep-tech ecosystem. Leveraging its strong scientific research, Europe can lead in deep-tech innovation, driving economic growth across industries.
Amit Khanna, 7startup Founder
Amit has two decades of experience in the industry and an MBA. He supports entrepreneurs with every aspect of their business including concept and product development, investor presentations, and fundraising. Amit & 7startup assist startups in the pre due-diligence process and help connect them to our vast network of investors. Reach out to us today and see if we’re a fit!
