Deep Tech and the complexities of investment

Deep Tech represents scientific and engineering advances that address global challenges such as climate change, resource scarcity, food security, energy transition and health. These technologies, ranging from advanced AI and quantum computing to biotechnology, robotics, nanotechnology and clean energy systems, have the potential to transform industries and create entirely new markets. However, the path to commercialization for Deep Tech startups is fraught with unique challenges, including long development cycles, heavy upfront investments, and significant technical risks compared to traditional tech startups, he explains in a statement. opinion article Isabel MillánPhD from Euro-Funding, in which he analyzes the complexity that companies and projects can encounter when investing in Deep Tech.

Unlike traditional companies, Deep Tech startups entail longer development periods and face more research and development needs before achieving an adequate relationship between product and market. These companies may need up to 35% more time and 48% more financing to start generating income. For example, the approximate time to achieve Series A in Deep Tech takes 18 months longer on average than in the software sector. This means that founders and their investors deal with greater dilution and growth trajectories that require more capital. Additionally, the teams at these startups often come from academic or scientific backgrounds that, while offering the necessary technical expertise, sometimes lack the business skills to scale effectively. Deep Tech startups also face high technological risk, because cutting-edge innovations do not always operate as expected, adding another uncertainty to their commercialization process.

The Death Valley of Innovation

One of the main challenges for Deep Tech startups is to overcome the complex period called the Death Valley of Innovation. This critical phase lies between initial research and commercial viability, often where financial resources are exhausted. Private investors, especially venture capital firms, are often reluctant to invest at this stage due to the uncertainty and long lead times required to validate the technology and achieve market acceptance. As a consequence, many Deep Tech companies with great transformative potential have difficulty obtaining the required funds. In Europe, much of the venture capital allocated to Deep Tech in the pre-seed (0-1 million euros), seed (1-4 million euros) and Series A (4-15 million euros) phases comes from national investors, which causes a notable lack of financing for startups seeking to scale.

The strategic relevance of Europe in the field of Deep Tech

Despite the challenges, Europe is in a great position to become a global leader in Deep Tech. In 2023, venture capital investments in Europe will exceed €10 billion for early-stage Deep Tech startups, leading to which means a growing interest in promoting innovations. Europe has a strong research base, home to six of the top 20 science institutions globally, and it also has an outstanding pool of STEM graduates, almost 1.5 times larger than the United States. Furthermore, Europe stands out in the protection of intellectual property, registering more than 193,000 patents in 2023 through the European Patent Office (EPO), of which a large number are related to advanced technological innovation in Deep Tech. Public perception is very positive, with 90% of Europeans recognizing the beneficial impact of science and technology on society.

The role of European public financing

This is where public funding, such as the European Innovation Council Accelerator (European Innovation Council (EIC) Accelerator), becomes vital in Europe. While private equity typically focuses on startups with faster returns, the EIC specifically targets Deep Tech companies in the Innovation Death Valley. The EIC offers up to €17.5 million in a combination of grants and capital to help these startups bridge funding gaps, validate their technologies, and scale toward commercialization.

Since 2021, the EIC has awarded more than €4 billion to 631 companies, addressing the funding gap that exists at this critical stage of development. By reducing the risk of cutting-edge innovations, public financing makes these companies more attractive to private investors, helping them secure later-stage investments and avoid stagnation. Additionally, the Commission has recently launched a Trusted Investors Network (Trusted Investors Network) which brings together a group of investors willing to co-invest in innovative Deep Tech companies in Europe together with the EU. These investors will work together with the support of the EIC to drive investment and exchange best practices when investing in the Deep Tech sector.