Deeptech/Analysis/

Scaling deeptech in Europe: Where’s the smart money?

A lack of lead investors — the so-called “White Knight Syndrome” — is the main obstacle to scaling up really difficult tech. What can be done about it?

By Becca Lipman

Source: Yuyeung Lau, unsplash

European deeptech is seeing record amounts of investment and is on track to raise more in 2022 than in 2021, despite the turbulent economic conditions. But this masks a brewing challenge. Many deeptech companies are ready to grow out of the early stages but can’t find investors to back them. 

Research by the Boston Consulting Group confirms a shortage of lead investors in Europe. That’s a tough challenge for an industry that requires more capital expenditure than most others. 

And at the latest Sifted Pro Roundtable, deeptech founders, investors and accelerator heads shared their thoughts on scaling. In a poll, 65% agreed the biggest obstacle was lack of lead investors and thus funding. The second most popular choice, at 15%, was slow corporates.

So what can deeptech founders do about it? Experts gave this advice:

Consider a change in scenery

Many deeptech companies prefer to scale in America — for good reasons. 

Compared to Europe there’s a large, mature and relatively less risk-averse pool of investors to pitch. And many prefer the US because there’s one language and one dominant regulatory framework that’s typically more supportive of new tech.

Those sticking it out in Europe should expect a struggle to find accommodating VCs — the most common source of funding in Europe. They are usually closed-end funds that expect a return within 10-12 years. That’s a bad fit for deeptech companies, which generally take longer to turn a profit or exit.

Founders have found it exhausting: “European investors always wanted to see more. Can we give them two years more of a financial plan? How can we ‘10x’ our vision?” 

Experts advised seeking out family offices in Europe or other funds that invest from their balance sheet. They’re more likely to have entrepreneurial mindsets and be willing to take risks on new tech. 

The European Innovation Council (EIC), meanwhile, has been offering grants, blended finance and equity investments to Europe’s deeptech startups since 2021. Despite a somewhat bumpy start, 70% of roundtable attendees said they consider it a legitimate source of support. 

Fix your pitch

It was largely agreed that deeptech companies are terrible at PR. When pitching, experts said that deeptech companies needed to stop focusing so much on their tech and more on how it can be used and the improvement it brings to markets. 

“There are plenty of really interesting, great solutions out there, but the most important thing is to commercialise it and to do that, you need to build out the business side and show how it can be used,” said one investor.

It helps a lot if you can prove that your futuristic tech can also be implemented now. An example is lunar mining technology, which has terrestrial applications as well. “Venture capitalists like to see revenue streams,” as the investor added.

Be wary of university spinouts

University spinouts draw mixed reactions. Some attendees are successful spinouts and some have profited from investments in them. But others say that down the line when seeking new investment or trying to commercialise intellectual property (IP), entanglements in universities can be more trouble than they’re worth or even flat-out detrimental. 

In a recent Air Street survey of university spinouts, few founders said they were happy with their experience, adding that universities were ”too greedy” for equity, took too long to complete deals and had far too many strings attached. Left with a bad taste in their mouths, 64% had no intention of supporting their alma mater even if they became successful. 

The advice: universities have different agendas, so shop around for ones that align with your vision. In Sweden, for example, IP rights belong to the researchers by law, not the universities. 

Seek investors with common beliefs

Deeptech founders trying to change the world should look for investors determined to do the same. 

While VCs and corporates are often fixated on the next quarter’s reporting, others are more focused on, for example, climate change. 

As one founder said, it takes conviction to stick to a plan when financial targets aren’t being hit. “We see more traction with investors that want to change the world together”, they said, especially when calculating returns on investments is “a futile exercise”. 

Sell a proof of concept as soon as you can

Deeptech founders sometimes think that if they access more capital, they’ll become successful. But many on our panel were adamant that this is a trap — the real problem is proving there is a viable market for your solution. 

Selling a proof of concept or beta version sends the message that there’s a confirmed need to solve a real problem. “If you can do that, then it’s usually easy to extract the big money, but if you don’t, it is more problematic,” one investor said.

And, they added, the quicker you can find somebody who wants to pay for a prototype or proof of concept, the more likely you are to succeed: “Access to potential commercial partners is extremely important.” 

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