Writing about Europe is hard today. Russia is invading Ukraine as we write, and global markets are in freefall. This is the continent’s political and military backdrop.
Last week, this column took a look at the European technology market’s deep tech expertise. Europe’s economic future, in other words.
We could have held off a day or two to compile this follow-up piece. But as many of the comments below are positive about Europe’s future, it felt reasonable to continue.
The Exchange started its look at European deep tech with a report from Angular Ventures. Its data paint a picture of record-setting capital disbursement into companies on the continent that are working on complicated, hard-to-commercialize, fundamental technologies.
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Today, we’re discussing responses to the data from a number of European investors, including Michael Jackson of the Cottonwood Technology Fund, Isabel Fox of Outsized Ventures, Nick Kingsbury and Andrea Traversone of Amadeus Capital Partners, and Cyril Bertrand of XAnge.
We’ll recap the data in question and then dive into differing perspectives on where European deep tech investing is going. The core views are that the pace of investment will slow some in 2022 from record highs set in 2021, that things appear stable thus far, and, finally, that this year could bring an acceleration in European deep tech investment and startup activity.
Out of fairness to our sources, it’s worth mentioning that they started drafting their answers before today. But the prospect of war was already looming, so considerations on what it might mean for private markets not immune to stock market dives, cyberattacks and other woes were already part of the conversation
On the other hand, it goes without saying that some deep tech projects will lower global – and therefore European – dependence on oil, gas and other similar fuels. There’s politics inside technology, in other words; it may be even clearer to say that technological change impacts politics.
Traversone hit on this in an email to TechCrunch, writing that “the current geopolitical situation is fuelling” a lot more interest in “healthcare and cybersecurity deep tech” and so-called “sovereign tech,” with focus sometimes landing on “strategic areas such as semiconductors, telecom equipment, and power technologies.”
Our starting point last week was Angular’s report, with an important caveat: It focused on both enterprise and deep tech investments. The pairing of the two groups makes sense in a way, as it helped detail how Europe’s venture capital market is moving its focus away from consumer tech. But for our purposes, we want to be clear about what deep tech is and is not.
Jackson argues that deep tech “can mean a lot of things … and because of how nebulous a term it’s become, it means less and less.” We agree. And while we don’t want to narrow our focus too much, especially as new disciplines continue to emerge, we want to make it clear that we too are talking about what Jackson describes as “the ‘deep’ end of the deep tech pool — robotics, semiconductors, energy transfer, medical devices, hardware, all that fun stuff!”
What’s ahead for deep tech in Europe
In the wake of a record-setting venture capital market in 2021, seeing minor declines in dollar or deal volume in 2022 would hardly be a retreat. At the same time, there are some venture investors who anticipate that the European deep tech market will accelerate further. As we explore our question, please keep in mind that those forecasting a deceleration are hardly pessimists; when we consider deep tech investment on the continent in 2019 and 2020, they are still likely anticipating bullish results.
The modestly bearish take
Caveats aside, Amadeus Capital Partners’ Nick Kingsbury expects European “investment in deep tech to be at or above 2020 levels this year, but not hit the dizzy heights of 2021.” The investor said that their firm is seeing both small and large rounds advancing with “reasonable pace,” albeit not at the “frenetic” cadence of the back-half of last year. We take this to mean that both early- and late-stage capital is available for deep tech on the continent.
What could be driving a potential slowdown from 2021’s investing pace? Traversone, also from Amadeus, has a suggestion: more dollars than confidence. Or as he put it, “current market volatility” is driving a moment in which “there is a lot more cash than conviction” when it comes to deep tech investing in Europe. In practice, the investor said, the cash-conviction divergence “means there is lots of capital available but few lead investors who have the conviction to lead a round.”
The result of the market moment, Traversone wrote, is that we “can expect fewer, yet higher-quality, propositions to be backed in 2022 versus 2021” in the deep tech market.
Before we move on to folks anticipating growth in deep tech investing in Europe this year, it’s worth understanding how their perspective is grounded. Kingsbury told TechCrunch that “Europe does not have an intrinsic advantage or disadvantage” over other markets when it comes to building a deep tech hub, “even if the breadth of university research across the continent helps” it.
Given the global fame of the European university system, you might be surprised to hear that. Kingsbury’s coworker has some context on the matter. Traversone argues that as “deep tech markets are global” in nature – inclusive of Europe – there is “no particular reason one region should lead or fall behind.” That said, there are things that Europe could do to help its own deep tech investment bear fruit. Per the investor, Europe’s deep tech prominence – or lack thereof – could be encouraged by “government support” in the form of “IP regulations, funding support and simplifying the process of attracting global talent.”
Easy enough, yeah? No. Traversone closed out his notes on this matter by stating that the steps needed to support deep tech will require “working with a very long time horizon in mind.”
The more bullish perspective
On the more bullish side of things, some investors report that the market in 2022 is the same as 2021, and one actually expects an acceleration.
Outsized Ventures’ Isabel Fox told TechCrunch that her firm is “not seeing a slowdown in appetite for potentially game-changing technologies,” categories that include things like augmented and virtual reality, biotech, future computing and robotics. (Fox also mentioned quantum computing, something that a few investors brought up, and something to keep in mind.)
XAnge’s Cyril Bertrand struck a similar chord, writing that his firm is not seeing “any deceleration at the beginning of 2022” when it comes to European deep tech investment. He reports that deep tech investment is benefiting from “good market conditions” that are boosting early-stage investment more generally.
Bertrand found reason for optimism outside of present-day investing results. The investor said that local European governments have “big ambitions” in deep tech. One example provided by the investor is the French government “designat[ing] AI, cybersecurity, and quantum computing as primary areas of focus for the country’s future.” (For more on that matter, head here.)
Finally, the most bullish take comes from Jackson, who wrote that “2022 will see more deals and more overall investment into European deep tech.” Partially driving the gains he anticipates are more corporate venture capital activity and more demand for deep tech startup shares from non-European investors. And not just from the United States; Jackson said that capital inflows could come from “Canada, Taiwan, Japan, South Korea, Singapore” and other locales, as “European AI, medtech, climate tech, automation” and other technology work commands “much deserved attention.”
More wishes
There are some conditions that Europe needs to fulfill to reach its full potential, our sources agreed. Touching again on the intellectual property issues that Kingsbury mentioned, Fox predicted that “some countries will get left behind … if they do not move with the times (for instance, IP transfer offices) and focus on building an ecosystem.”
We also understand that progress across Europe is uneven. For instance, U.K-based Kingsbury praises the British Business Bank’s efforts to fund his country’s tech ecosystem. But he is hoping for public policy that would contribute to “persuading our pension fund and insurance industries to take a small step into private markets” – something France has already been doing with its Tibi initiative.
Overall, “Public funding has been incredibly important to boost the European deep tech sector,” Kingsbury said. He hopes that this will continue to be a priority, but also that there will be at least “a few locally listed champions,” as it would “make a big difference.”
According to the investor, local listings would be a way for Europe to keep its deep tech winners around for longer, a necessity for “success [to] breed success.” But if it were to collide with nationalist tendencies, that could be a double-edged sword – think of Dailymotion, or closer to our days and to deep tech, of Arm.
“The danger is if European countries start trying to create walled gardens around their deep tech ecosystems,” Jackson warned.
There’s a lot at stake. This isn’t just about succeeding in deep tech, Jackson suggested. “I firmly believe that Europe having a thriving deep tech ecosystem is its best chance at staying economically relevant this century.”
Economic relevance is no small matter for Europe, and there are risks. Jackson said that Europe’s deep tech startups of today “have the potential to be tomorrow’s tech giants,” adding that “Europe really needs a few tech giants of its own.”
Jackson and Bertrand agreed on what European deep tech needs to succeed: collaboration. For Bertrand, it means that “European stakeholders will have to play collectively to win the game.” And for Jackson, “pan-European collaboration to make sure Europe provides the best possible conditions for it to succeed.” This, he added, “means eliminating friction points, and a fragmented Europe is a friction point.”
With less fragmentation and more collaboration, “Europe could emerge as a deep tech champion,” Bertrand said. But were it to fail, Europe would vindicate its skeptics, however unjust or dated their view may be.
“Some people act like Europe is a backwater,” Jackson noted, “but it’s important to remember that it’s one of the richest, most prosperous places on earth with a great history of innovation and science.”