March 20, 2023

The other funding gap: it’s not just unicorns that are leaving Europe

Promising early-stage deeptech founders increasingly feel they can’t build something big in Europe

Sven Jungmann

5 min read

The “unicorn drain” phenomenon in Europe is well documented. Many countries across the continent have lost later-stage companies to the United States due to a lack of growth capital and limited exit options. 

However, another overlooked — and potentially more concerning — exodus is occurring. More promising pre-seed entrepreneurs are weighing a move to US and Asia. Many are deeptech companies in highly regulated industries like healthcare, struggling with onerous and bureaucratic regulations. 

How do I know? Because I’m an early-stage deeptech entrepreneur who has also thought many times about leaving Europe for exactly the same reasons. 


An uphill battle

Launching a deeptech venture in Europe can feel like deliberately choosing an uphill battle. Policymakers are uncooperative and unapproachable and regulation overly burdensome — so going international is a way for founders to hedge their risk. 

These policy concerns are especially true for the industries that we as a region claim to hold particularly dear, like healthcare and sustainability. The recently enacted European Medical Device Regulation (MDR), for example, is seen as so onerous that some German VC partners publicly confirmed that they are steering clear of new medtech investments in its wake. Any prudent medtech entrepreneur (and investor) will plan for multi-year delays in the approval process. 

If we want to attract innovation, we need to step up: innovation needs investment rather than restrictions

“While, two years ago, international digital health startups asked us for help to enter the European or in particular the German healthcare market, companies now rather come to us because they want to access the US market instead,” says Dr Robert Schnitzler, managing director of Berlin-based RoX Health, one of my strategic partners. 

“If we want to attract innovation, we need to step up: Innovation needs investment rather than restrictions.”

Contrast that with the US. European founders who engage with the US Food and Drug Administration (FDA) — the government body that regulates food, drugs and medical devices — for the first time are often surprised by how collaborative the interaction is.

“There’s no ‘FDA-moment’, we recommend you speak with us as early as possible,” an FDA official explained to me. “Since we’re looking at innovations, by definition, we don’t have all the answers yet, but we’re here to find them together with you.” 

European VCs have a hardware allergy

Even if startups are able to overcome regulatory hurdles, they have to deal with risk-shy — and hardware allergic — VCs on the continent. European VCs stay away from regulated industries or complex science, often because they lack the knowledge to assess these businesses. 

Nine out of ten deeptech companies agree or tend to agree that European investors take less risk than their US peers, and 87% say they invest less, a BCG survey found recently

This risk aversion has created an early-stage funding gap for deeptech companies in Europe. Many early-stage European deeptech founders I know have been told that they’re too early to be backed. “We prefer to fund companies that already have a marketable product or even customers,” investors say.  

This approach might be sensible in B2B SaaS, ecommerce or gaming, but it misses how a deeptech company’s journey is fundamentally different from these kinds of companies. A life sciences company — and for good reason! — can’t just go out and sign up customers. A quantum computing company needs to prove its tech at a small scale before building big and selling. 

This essentially leaves truly groundbreaking innovations in the hands of large corporations, who have the financial stamina to withstand cost pressures and long times-to-market

This creates a chicken-and-egg problem because you can’t de-risk a venture without funding.

If VCs focus almost exclusively on software, we will remain dependent on foreign platforms like Taiwanese chips or Amazon’s logistics infrastructure. Remember that many of the world’s most successful companies combine hardware and software — including the world’s most valuable company, Apple. 

This essentially leaves truly groundbreaking innovations in the hands of large corporations who have the financial stamina to withstand cost pressures and long times-to-market, while startups drown in hefty regulatory compliance consultancy and legal fees before they sell a single product.

It takes a village to raise a child — the role of corporate Europe

Europeans are quick to look at the government to solve problems (and ironically enough, Europe’s most active deeptech investors are government funds).  

But this is a challenge that politicians alone will not be able to solve. It’s a matter of encouraging more daring by investors to properly analyse and back deeptech startups. 

Corporate Europe also must bear some responsibility. Given Europe’s historically strong background in manufacturing, life sciences and the chemical industry, there are significant assets and know-how available that could be used to help budding ventures take off. RoX Health, a venture builder arm of healthcare giant Roche, is a great example. It offers startups expertise and networks along the entire startup journey touching relevant aspects of organisational and portfolio development, market access and commercialisation.

It’s a big and complex task to change regulations, encourage more constructive corporate involvement, and more investment from VCs. Government funding or insular solutions alone won’t make Europe a truly fertile ground for deeptech innovation. We all need to up our game and focus on our shared goal of bringing more innovation to humanity. 

If we can’t do that, we have no grounds to complain about premier entrepreneurial talent leaving Europe to build abroad. I am lucky enough to have found stellar investors and influential partners with deep expertise that make it possible to stay in Europe — for now. However, that journey was, without doubt, the toughest experience of my life, and I will have to constantly reassess if Europe is the right environment for my deeptech startup.

Sven Jungmann is the CEO and cofounder of Halitus.

Sven Jungmann

Dr. Sven Jungmann, a medical doctor turned entrepreneur, is currently co-founding and leading a machine olfaction company that aims to detect diseases in your breath.