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OpenOcean’s Ekaterina Almasque examines the challenges Europe faces to stay competitive in the deep-tech race but also how it’s unique attributes could be a benefit.
In recent years, Europe has emerged as a major hub for deep-tech innovation, with tremendous potential in sectors like AI, quantum computing and automation. The continent possesses world-class technical talent, prestigious universities and plentiful funding that has allowed cities like London, Oxford and Cambridge to emerge as major hubs. UK tech start-ups alone have recently been valued at a combined £820bn, behind only the US and China.
However, challenges remain in translating these strengths into global leadership and commercial success. While great at founding deep-tech businesses, European firms often don’t see the region as a place for long-term expansion. The recent TechUK report has sounded a wake-up call for the UK, shedding light on the absence of a coherent long-term strategy to bolster its tech sector.
The lack of a robust deep-tech strategy isn’t just a UK issue; it’s a call for a Europe-specific strategy that builds on the continent’s strengths and secures its position as a global force in deep-tech innovation.
Major state-backed initiatives in the US present a challenge for European governments, but with targeted policies and funding mechanisms, Europe can become an environment where deep tech thrives.
European market landscape
Deep-technology start-ups in Europe have seen robust growth and remained resilient despite recent economic instability. In 2022, European deep-tech companies raised $17.7bn in funding, a 22pc decrease from 2021, but a 60pc increase compared to 2020, according to Dealroom.
While deep-tech funding has remained strong, the European start-up ecosystem showed signs of stalling in 2022 compared to the rapid expansion of prior years. The State of European Tech report showed exit values plateaued and US investor funding declined significantly.
Major European economies like France and Germany faced similar stark declines as growth stagnated after years of rapid expansion. Though the ecosystem has proven more resilient than during past crises, the cooling of growth in 2022 compared to 2021 led US investors to pull back funding.
However, Europe has plenty of reason for optimism. Our historical expertise in science, mathematics and manufacturing serves as a strong foundation for deep-tech growth. The European tech ecosystem has added $2trn in value since 2017, growing at an average rate of 23pc per year over the past decade.
To harness this potential, we need to recognise that Europe’s diversity is an asset; collaboration between nations, academia and the private sector can yield breakthroughs that none could achieve alone.
Facing stiff competition from the US
The thriving technology industry in the US has emerged as a major source of competition for European start-ups and tech firms. Several factors have drawn European companies across the Atlantic: abundant access to capital, a favourable regulatory environment and strong strategic support from the US government to name a few.
A critical factor pulling European start-ups to the US is the level of strategic support for the tech industry there. In 2021 and 2022, the US government brought in three major pieces of legislation: the Infrastructure Investment and Jobs Act, the Creating Helpful Incentives to Produce Semiconductors and Science Act, and the Inflation Reduction Act. According to Deloitte analysis, this package represents more than $2trn in federal funding and incentives for the US economy.
The depth of pools of capital in the US, fuelled by the presence of large institutional investors and funds focused on high-growth tech, also provides an advantage. The decision by British microchip designer Arm to pursue a US stock exchange listing over London was a totemic moment.
It sent a message that firms were being drawn to the strategic support and favourable environment in the US compared to Europe. Creating domestic deep-tech champions will require Europe to build larger, specialised VC funds and attract more institutional investors willing to back high-risk, capital-intensive technologies over a longer timeframe.
Overcoming the competition from the US stands as a pressing challenge that Europe needs to address through policy solutions if it hopes to retain promising companies and talent.
Deep-tech growth
As UK Chancellor of the Exchequer Jeremy Hunt, MP, recently returned from his mission to Silicon Valley with a proposal for a global AI watchdog, Europe stands ready for a defining moment. The chancellor held talks with tech giants including Microsoft, Amazon and Alphabet across the US, as he seeks to boost investment in the UK. The world’s gaze is fixed on whether we can stand shoulder-to-shoulder with Silicon Valley’s giants. Can Europe become a force to be reckoned with in deep tech innovation? The answer hinges on our ability to forge unity among diversity, leverage our strengths and embrace investment in STEM.
According to Boston Consulting Group, European deep-tech investment has experienced remarkable annual growth of around 50pc since 2015. This statistic speaks volumes about the potential, but it also underscores the imperative of nurturing this growth. The domains of AI, quantum computing and automation are battlegrounds for global supremacy. However, to emerge victorious, we must invest in research and development, as well as a long-term strategy.
As the UK will rejoin the European Horizon scheme, governments can bring institutional investors to the table and align private capital towards ventures that yield long-term dividends. This is not just about short-term gains but about laying the groundwork for lasting innovation. Recent success stories include the House of Quantum in Amsterdam and the NATO Innovation Fund, which demonstrate the impact of cohesive government support.
Looking beyond borders, it’s crucial to draw inspiration from global endeavours that mirror our ambitions. Brazil’s Quantum Technology Competence Center, for example, exemplifies the power of coordinated efforts and underscores that Europe’s journey to deep-tech dominance is not a solitary one. It’s a global movement that requires vision, strategy and alignment.
The roadmap to innovation
As we build a strategy to solidify the European deep-tech ecosystem, we must implement solutions to tap into private-sector investment, leverage deep-tech initiatives and drive responsible AI adoption.
Smaller European states can tap into pension funds’ vast capital to fuel strategic sectors, fostering collaboration between investors and stakeholders to align with sustainable growth.
Governments should recognise deep tech’s potential and create regional hubs to nurture start-ups via collaboration between academia, industry and government.
The UK is poised to lead responsible AI adoption by striking a balance between EU privacy-first and US market-led stances. Regulations can prioritise data protection and transparency while permitting innovation flexibility.
Implementing these solutions will stimulate economic growth, attract talent and establish Europe as an innovation and sustainability leader.
Forging Europe’s deep-tech purpose
European investors are now presented with an opportunity to emerge from the shadows and establish themselves as a powerhouse of deep tech. This goes beyond individual start-ups or unicorns. It’s about cultivating an ecosystem that champions innovation, supports entrepreneurs and attracts global investment.
Europe’s diversity is its strength, and by nurturing a united front, we can present a formidable challenge to Silicon Valley’s hegemony. As we contemplate the path ahead, one thing is clear: European governments, investors and researchers must take charge of their roles as catalysts for deep-tech growth to transform potential into reality.
Ekaterina Almasque is a general partner at OpenOcean, an early-stage venture capital firm investing in software across Europe.
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