The future of Europe’s startup ecosystem lies at the feet of the continent’s deeptech startups, according to the European Commission, which sees the deeptech sector as key to challenging the US and China’s tech dominance.
But Europe has a deeptech scaling problem — not ideal for companies looking to go from burgeoning to behemoth.
According to a survey of founders and investors by the European Innovation Council’s (EIC) ScalingUp initiative — led by the Boston Consulting Group (BCG), TechTour, Bpifrance and Deepwave Ventures — deeptech startups on the continent struggle to:
- Secure financing and, in particular, a lead investor;
- Build and leverage a strong and productive board of directors with independent members;
- Develop a compelling business strategy and investment narrative;
- Navigate European institutional challenges.
A new report released today by BCG — which builds on the findings of the survey — aims to provide further clarity on the challenges facing Europe’s deeptechs, and its authors think corporates could be a key part of the solution. For the report BCG interviewed all 37 companies in the EIC Growth Club — a group of high-potential European deeptech companies entering the scaleup phase — surveyed 52 investors and 54 deeptech companies.
Corporates seem less affected by the current market
While the initial survey criticised corporate involvement with scaleups as too slow, some of the authors now see a more crucial role for them to play — especially in the current slowdown.
“The traditional wisdom is that corporate investment disappears as soon as there is a downturn. This time is a bit different,” says Jean-Michel Deligny, contributor to the report and chair of the EIC’s ScalingUp selection committee.
“First, corporate profits are not nearly as much under pressure yet. It may well be that they manage the downturn and remain profitable, which would be unusual, but also, although I don’t have data to prove it, it seems that corporates have changed fundamentally,” he adds.
According to him, corporates now understand that their own survival is at stake when it comes to investing in deeptech. He sees that large firms are not as opportunistic as they might have been, taking a more strategic view to getting involved with younger companies. This could make them a good source of investment, even through the downturn.
“The corporate investor market will probably have a more steady hand than financial investors, who will tend to be much more wary because of their LPs breathing down their necks,” Deligny says.
Corporates could provide experienced board members
Among the challenges holding European deeptech companies back from scaling to their potential is the lack of non-executive board members with deep industry experience, who can help guide a scaleup through its growth phase.
The survey showed that boards that included non-executive directors were far more likely to be rated as trusted advisers versus boards that did not include them. Moreover, scaleups rated boards with non-executive directors to be significantly more impactful in helping with strategy and scaling.
“Deeptech requires strong endorsement by experienced industry executives to get CVCs and financial investors involved,” Deligny says.
The report mentions that this is actually good news. Investors the authors spoke to say that “Europe has an underleveraged pool of C-suite-level talent with relevant industry experience available to fill these positions. While few are accustomed to the venture capital and startup environment, dedicated training programmes are available, such as the Board Education program at the Technical University of Denmark.”
Corporates can provide an important signalling function
Thanks to newer forms of corporate innovation such as venture clienting, corporates have a lower barrier for entry to express interest in deeptech solutions developed by startups and scaleups.
“If you think about it, deeptech companies work on breakthrough technologies without making any revenue. Unless someone in the market says, ‘this is important to me, this can change my business’, financial investors will not touch it,” Deligny says.
Jean-François Bobier, another report coauthor and partner and director within BCG’s deeptech team, adds that corporates “can also start the process by buying a solution to pilot with it, not necessarily invest. So, for example, Pasqal, which is a quantum computing scaleup, has a $1m pilot with Crédit Agricole. And that's a big endorsement from a big corporate.”
Signalling works both ways
The signalling function of partnering with a deeptech startup working on possibly gamechanging technology works both ways, however. Corporates can benefit from being seen as taking an interest in innovation, although Deligny says that this is not particularly common.
“We see fewer situations where corporates publicise what they're doing with the startup. They don’t want companies to know what they’re doing,” he says.
“Corporates are not in the business of helping startups, they are in the business of building competitive advantage. But you know, one way they can build a company advantage is by locking in some technology from some startup.”
Massimo Portincaso, founder of Deepwave Ventures and another coauthor, says that this might change. “I think that we're going to move to where the world becomes closer and closer to the one of biopharma, where companies are constantly looking at the outside and bringing in solutions. We're far from it, and pharma took 20 years before it got there, but we’re at the beginning of this transition.”
The report also notes that current procurement processes at large corporates are often unsuited to working with fast-moving scaleups.
As Christian Hüttenhein of Bosch’s venture clienting unit told Sifted last month, corporate procurement is often a slow process that can take an unreasonable amount of time and effort from an under-resourced startup.
The BCG reports says: “Corporate partners often place constraints on collaboration and the procurement process, sometimes demanding exclusivity, which both young companies and their investors want to avoid.
“Corporate partners may also look for products that are 100% market ready, while deeptech companies often are seeking help with continued development.”
Deeptech companies would benefit from a more structured approach to procurement specifically targeting startups, aimed at piloting solutions that might not be market-ready yet, but can benefit from being used in a practical setting.
Corporates could be long-term LPs
Deeptech companies in Europe face another problem –– a lack of deep industry experience from investors.
“Only a fraction of European generalist investors have a strong grounding in advanced technologies. Moreover, many limited partners (such as pension funds and family offices) are reluctant to take this type of risk. A substantial majority of executives at deeptech companies and more than three-quarters of the investors we surveyed believe that European investors do not have a good understanding of what deeptech is,” the report states.
Corporates could help make a difference here as well, both on the experience side and by providing more patient capital.
“First, we need larger funds in Europe to lead rounds for deeptech companies, and larger funds need partners who are more educated,“ says Arnaud Legris of Deepwave Ventures. “Corporates could be these long-term experienced LPs. Some are already supporting some deeptech funds, but maybe growing the number of them could be beneficial.”
To this point Deligny adds that Valeo, a tier-one automotive supplier, is a great example of how this could work. The company is involved in multiple channels of financing and working with startups, but most notably is a major LP in Cathay Capital –– one of the fastest growing venture asset managers in Europe. “And as we know, we need successful role models to encourage more people to do the same,” he says.
“I think deeptech is still in a situation where it’s an unproven asset class, but that could change very quickly. And actually, the current downturn could be a good time to show that Europe has some true USPs in deeptech, and help more people understand that the number one USP is this network of universities, which are producing an insane amount of IP.”