If you track the global AI race, you’d be forgiven for thinking that there are only two nations fighting for leadership. But China and the United States are far from the only technology markets with developed startup and incumbent cohorts, strong venture capital activity, and capital markets able to translate early-stage ideas into public companies.
The AI race is part of a larger deep technology competition that includes things like chip fabrication, another flashpoint often discussed as a U.S-China issue. The reality is that many countries are betting on deep tech — what The Exchange considers investment into complex technology that may lack immediate commercial application, or is focused on laying the groundwork for other, more market-friendly products.
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We’re curious if Europe can form a third, independent center or group of hubs for deep tech investment, IP and company creation that’s separate from China and the United States.
We’re approaching the question in two parts: Today, we’re analyzing Angular Ventures’ report on VC investment into enterprise and deep tech in Europe and Israel. Then, early next week, we’ll collect commentary on the question from leading European investors and founders to better understand the on-the-ground perspective.
Rising totals
To start, a few caveats. The Angular Ventures report includes data from Israel, an active deep tech market. And what the venture firm has put together is inclusive of some enterprise investment (SaaS, fintech, e-commerce and so forth). So we’re going to need to do some parsing, but no data set is perfect, and what Angular published is very useful.
The first data point that we need to consider is focus. Angular divides venture capital activity into two buckets that are useful for broad comparisons. If we observe the venture capital market of Europe from an enterprise and deep tech versus consumer perspective, data indicate that the continent has radically changed its investment focus from balance to a preponderance of non-consumer work.
From 2014 through 2017, for example, the two broad categories were roughly matched, each holding around 50% of venture activity in Europe. But in 2018 through today, that parity shifted to a roughly two-thirds/one-third split, with European deep tech and enterprise investment taking the majority of deal flow.
That recent and sharp divergence in venture focus on Europe helps explain why our question is more than idle. Europe has evolved from a market that was pretty evenly split between consumer and non-consumer investments toward one that is heavily biased in favor of back-end tech over consumer-facing products.
Ratios, of course, are only so useful. What we need now is a look at the total amount of capital disbursed into deep tech and enterprise venture rounds in Europe over time. The following quarterly breakdown (the second chart in the following, zoom in here) gives a good look at how quickly investments of this type have scaled in the area:
This goes to show why the question we’re asking feels pressing now. The pace at which the general category of investment we’re chasing – even if we want a more specific slice of the European venture market than the above chart provides – has posted simply astronomical growth in the last few quarters.
From here we can find niches into some more focused work. We don’t want to understand all European and Israeli enterprise and deep tech venture activity. We just want the latter category. Thankfully, Angular did a pretty functional breakdown of 2020 versus 2021 venture capital activity in the region by market (the second chart in the following, zoom in here):
That there’s been a lot of money invested into fintech recently in any particular market is the definition of non-news. But we were not aware of how rapidly environmental, energy, logistics, industrial, automotive and agtech investments had grown individually just in the last year. Not every investment in those categories will wind up fitting neatly into our deep tech definition, but directionally it does appear that capital is flowing into the right areas for a European deep tech nexus, or cluster of nexuses, to form.
To sum it up: Europe’s venture capital market’s focus has shifted more toward deep tech investing over time; the amount of capital flowing into the meta-category that we care about is increasing; and when we dial down to more specific company cohorts that fit the deep tech definition, we can see rapid growth in many.
Now let’s talk geography.
By country
If you want to figure out which countries are leading the way in deep tech investing, you will first have to decide what’s most important: per capita results or totals.
If it’s per capita investment you are looking at, you’ll see that Israel is far ahead in terms of VC dollars flowing into deep tech and enterprise startups. According to Angular’s data, Luxembourg and Estonia take the second and third places, followed by Sweden and the U.K.
If you’re considering totals, however, the picture looks different. The U.K. jumps into pole position, followed by Israel, Germany, France and Sweden. But beyond the ranking, it’s worth noting that there’s a quite significant gap between the top two countries, then again between Germany and France, and between France and the next countries in the ranking. (It’s slide 23 of Angular’s report if you want to get into specifics.)
Our impression is that the per capita perspective and the raw ranking are both useful because it’s important to know which small countries are outperforming their peers, but also which countries account for the most capital overall.
There’s some overlap between leading countries and those that attract the most capital from U.S. sources — Israel, the U.K, Germany and France. But the impact of U.S. capital shouldn’t be overstated. Its proportion has remained steady for the past few years, Angular noted.
But taking a step back, a ranking by country doesn’t tell a shared story. Could Europe emerge as a deep tech champion? Or will there be a race between the EU countries, the U.K. and Switzerland, or even between countries and hubs inside the EU? This is one of the things we’ll be looking at in our next piece.