Europe has thriving Deep Tech scene, UK and France are top hubs

19 February 2018 Authored by Consultancy.uk

Deep Tech start-ups are set for a bright future in Europe. Since 2015, venture capital investments into Deep Tech have grown three times faster than overall tech start-ups, with the UK and France standing out as the key hubs for investment and deployment.

Deep Tech is technology that is based on tangible engineering innovation or scientific advances and discoveries. Deep Tech is often set apart by its profound enabling power, the differentiation it can create, and its potential to catalyse change, while Deep Tech companies often possess fundamental and defensible engineering innovations that distinguish them from those companies that are focused on the incremental refinement or delivery of standardised technologies or only use business model innovation to create opportunities.

Entrepreneurs are creating new solutions based on disruptive technologies that they have developed, often in partnership with the most advanced research labs. These include artificial intelligence (AI), new materials, biotech, VR, IoT, nanotechnologies, and many more. With these capabilities, Deep Tech is well positioned to help businesses address global issues, such as energy transition, safety, ageing, and climate change, through cutting-edge technologies including AI, new materials, and Bio Tech.

Since 2015, VC investments into Deep Tech are growing faster in Europe than B2C start-upsIn order to understand the potential of Deep Tech to transform the market, global consultancy Wavestone conducted a global survey examining what makes Deep Tech start-ups attractive to private equity (PE) firms. The poll was answered by more than 100 investors, while it was supplemented with interviews of entrepreneurs, corporates and research labs.

Total venture capital investments hit $127 billion last year, with around 50% of money in play being relating to software development. According to the latests research, this has particularly led to Europe seeing a steep increase in Deep Tech investments from €0.4 billion to €2.3 billion between 2012 and 2016. Last year, this culminated in the larger portion of investment focus shifting from B2C start-ups (€3.7 billion) towards Deep Techs (€4.6 billion) for the first time. Europe might have missed the tech start-up wave, but Deep Tech rises as the new frontier, with the likes of trinckle 3D, Cleverciti, OptioPay, ApiOmat and Lexplore poised to take advantage of this.

Success factors for Deep Tech

This growing popularity is broadly attributed by investors to three key factors. When considering investing in Deep Techs, investors put priority on talent and a favorable environment, while access to finance ranks third.

AI, Bio Tech and IoT are the hottest topics for investors

First, the nature of Deep Techs sees them based around new technology, which means attracting and retaining top talent is key to their development. The academic quality of scientific universities, the density of researchers and their entrepreneurial mindset are the most important criteria for the development of a Deep Tech ecosystem. The talent which existing Deep Techs, therefore, have access to by default makes them attractive prospects for investors.

This especially applies to such groups in five major economies. France is listed by 94% of respondents to Wavestone’s poll as being one of the five nations that is home to the most concentrated amount of talent. Israel (88%) and the USA (86%) follow closely, while the UK ranks a distant fourth on 43%, slightly ahead of China.

Matt Turck, Managing Director at First Mark Cap, told researchers, “The French Deep Tech ecosystem benefits from a particularly strong technical talent pool and has experienced a real acceleration in terms of overall start-up activity. In addition, French entrepreneurs now display a  whole different level of ambition, as they no longer want to just build a successful French or European company; rather instead they aim to build worldwide category leaders.”

France, Israel and the USA lead the pack in terms of talent

Following from France and the UK’s success in terms of Deep Tech talent pool volume, Europe ticks all the boxes as a whole and also ticks all the boxes for environmental factors that can foster Deep Tech success. Ranking just behind talent in terms of their pertinence, four environmental factors were cited by investors as reasons to sink capital into the Deep Tech scene of a country. These were a connection to academic institutions and universities; the availability of scientific facilities, resources and services; direct access to a large market; and the existence of industries in which the products and services can be deployed.

Europe hosts all these conditions, and gives firms access to the largest market worldwide. While the region features homogeneous regulation, thanks to the continental establishment of the EU, it also hosts large numbers of multilingual individuals, which can be considered a major boon to PE firms looking to invest in a project with global expansion goals. It also connects to the second largest academic ecosystem behind the US, and gathers the second most important pool of large companies.Environment is key and Europe ticks all the boxesSiraq Khaliq, a Partner of international technology investment firm Atomico, emphasised this potent blend, saying, “From a regulatory stand-point, harmonized regulation across Europe is very powerful. Europe has probably the most progressive, helpful and thoughtful regulatory environment which is especially important in areas such as new pharmaceuticals and emerging drug treatments, medtech, fintech including blockchain and cryptocurrencies, eVTOL aircraft etc.”

Respondents also gave a cluster of answers indicating that access to finance is the third most sought after quality in Deep Techs, by investors. Deep Techs need huge levels of investment in order to see their Research & Development funded for several years. Infrastructures supporting Deep Techs are very expensive, and so large amounts of seed money is required – meaning Deep Techs with access to multiple streams of finance are far more attractive to loan PE investors, seeking to lessen the risk of their own investment. The UK leads in Europe in terms of investments and access to finance. Invested Capital (2012-2017) in the UK Deep Tech scene currently sits at just over €1.6 billion, well above the nearest European rival of Switzerland, at €1.4 billion.

The UK leads in Europe in terms of investments and access to financeIn order to achieve the appropriate level of PE interest, having a favorable entrepreneurship ecosystem (incubators, accelerators, mentors, etc.) is necessary for success. Deep Tech specifically requires four elements to come together as a network of funding. This sees a unique combination of government funding, access to good quality, and low price scientific infrastructures by way of labs hosted by incubators.

Related: Venture capital funding hits $155 billion, but splits across fewer projects.

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