European deeptech can often be wildly misunderstood, weighed down by myths around cost, risk and investor appetite. But thankfully perceptions are starting to change. In 2024, venture investment in European deeptech startups reached around €15bn, the highest on record, according to Dealroom.
“Investors are becoming more comfortable with the fact that this sector has a unique risk profile,” Catherine Wright, Director of Consumer Internet, Climate and Deeptech and Corporate Banking at HSBC Innovation Banking UK, says. HSBC works with deeptech startups throughout their journey, with customers such as Raspberry Pi, Alphawave IP Group Plc, Optalysys and XYZ Reality. “It’s a hugely exciting space.”
What does this shift mean for entrepreneurs shaping the future of European innovation and what myths are still circling around the sector?
1/ Deeptech startups are more likely to fail
One of the prevailing myths around deeptech startups is that they’re riskier and more prone to failure. But data analysis by McKinsey shows the overall failure rate for a deeptech company is now roughly on par with traditional tech startups. While there’s slightly higher technical risk in the R&D-heavy pre-seed and seed stages, there are lower failure rates in the later commercialisation stages (Series B and beyond).
We pivoted to become a licensing business. The nice thing about that is that it takes you outside any working capital constraints.
Around 45% of deeptech ventures also file patents, more than double the rate of traditional startups. This IP acts as a safety net and gives banks and investors confidence, Wright says.
“Sometimes deeptech businesses will have dozens of patents,” she says. “Protecting IP is a crucial part of their business model.”
Licensing IP proved a lifeline for Cambridge-based computing startup Raspberry Pi. In the early stages, founder Eben Upton had initially intended to commission the manufacturing of his single-board computers himself, but demand quickly outstripped the £100k they had on hand.
“There was a queasy feeling that we had backed ourselves into a corner,” he says. “We pivoted to become a licensing business. The nice thing about that is that it takes you outside any working capital constraints. The business can scale arbitrarily.”
2/ Deeptech startups are too expensive to build
Deeptech startups must fund costly lab equipment and expensive research personnel, while facing intense R&D cycles and complex engineering hurdles. That means the early stages can be expensive. McKinsey found deeptech ventures demand up to 40% more funding to reach the revenue stage than conventional tech ventures.
In space tech, Rob Desborough, Managing Partner of Seraphim Space VC, says “companies typically need to raise twice as much money at a stage earlier than the general tech market... But your outlier returns are probably higher.”
Your outlier returns are probably higher.
Investors are catching on. Average seed and Series A rounds are growing, and 80% of European deeptech startups at pre-seed stage in 2024 were still in the concept or lab demonstration phase, up from 60% a year before.
Other avenues of funding, such as venture debt, can provide some much-needed support in those early stages too, Wright says.
“For startups that are fast growing but loss making, it helps to bridge the capital gap between equity funding rounds by providing additional runway to reach key milestones — without diluting ownership further.”
3/ Deeptech is only of interest to specialist investors
The €15bn raised by deeptech in 2024, represents between 28-33% of all venture capital in Europe. That means almost one in three VCs in Europe now goes into deeptech. It’s become the largest VC investment sector in Europe, outpacing fintech (€8.5bn in 2024) and life sciences (€8.7bn).
It’s one of the biggest myths that Upton from Raspberry Pi encountered: “This idea that there are investors who won’t understand what we’re doing. There are lots of ways of understanding the business and while what we do is very technical, that doesn’t render it immune to analysis by non-specialist people.”
Pre-IPO, Raspberry Pi raised $45m in 2021 from Lansdowne Partners and Ezrah Charitable Trust, a US-based private foundation.
There are lots of ways of understanding the business and while what we do is very technical, that doesn’t render it immune to analysis by non-specialist people.
That said, deeptech founders do need to focus on developing their storytelling ability to attract non-specialist investors, Desborough says. Seraphim launched a space accelerator in 2018 to help founders focus their pitch on the market problem rather than just the science problem.
“Typically they were PhD engineers, astro physicists and quantum scientists. If you gave them a five-minute pitch, you’d get four minutes, 50 seconds of science,” he says. “These founders need to be good enough at storytelling to convince investors they can win out on a global basis. Not just that they’ve got great science or technology, but that they can raise £50m in the next round as well.”
4/ It takes too long to see a return in deeptech
Another myth Desborough often encounters is the pace of deeptech: “When I'm speaking to peers in the general community, they don't understand how quickly the market is moving, which means you can get venture returns.”
He points to three IPOs Seraphim had in 2021 — the firm had invested in one for eight years, and the other two for less than five years.
When I'm speaking to peers in the general community, they don't understand how quickly the market is moving, which means you can get venture returns.
Increasingly VCs realise evaluating deeptech startups means looking beyond the metrics generalist investors might usually rely on in the due diligence phase. Instead, they must consider what startups have achieved technically, and the prowess of its founding team. It’s a shift from the revenue-first mindset, but means that deeptech startup founders now don’t have to force premature commercialisation to appease investors.
That final point is critical, Desborough adds. “Deeptech entrepreneurs need to really make sure the investor understands their business model, inflection points in the business and at what point they’re going to be generating revenues and reaching profitability. Otherwise there can be a nasty disconnect there.”
5/ Founders can’t build successful deeptechs in Europe
European deeptech success stories such as Aleph Aleph, Wayve and Sunfire are dispelling the myth that entrepreneurs can’t build global deeptech businesses from Europe.
There’s growing public sector support too, through EU Horizon and European Innovation Council programmes, Germany’s €1bn deep tech and climate fund and the UK’s £2.5bn support for quantum technologies.
We’ve got very strong businesses, some of which are arguably undervalued in the European market.
But it’s true that some capital is likely to still come from elsewhere. Currently, about half of late stage deeptech VC funding in Europe comes from outside Europe, with Asia and the US over represented.
“That’s a reflection of the fact that we’ve got very strong businesses, some of which are arguably undervalued in the European market – driven by structural factors,” Wright says. “We need to continue to work in partnership with governments and investors to ensure we’re channeling greater capital into this sector, to accelerate the commercialisation of innovation and the scaling of world-class technologies.”
She lauds the recently announced Tech Prosperity Deal, with the likes of Microsoft, Nvidia, OpenAI and Google committing £31bn of investment into the UK’s AI tech infrastructure.
Ultimately, the best deeptech companies will attract global capital, wherever they originate from, Seraphim’s Desborough says. “The best VCs are not driven by geography. They're looking for category leaders who can win out on a global basis.”
