Europe's deep tech sector is currently on an upward trajectory, witnessing a significant surge in both innovation and interest. This wave of development is heralding a new era of scientific and technological breakthroughs, with Europe aiming to play a leading role on the global innovation stage. Central to this vision is the ongoing debate about European competitiveness, as emphasized by the Draghi report, which highlights the need to enhance the innovation ecosystem and address investment gaps.

Europe's Deep Tech Revolution: Paving the Way for Global Leadership

Innovation and Investment in Europe's Deep Tech Sector

Europe's deep tech sector is experiencing a remarkable growth in both innovation and investment. From 2019 to 2023, Europe's share of global deep tech investment jumped from 10 percent to 19 percent. This upward trend is even more pronounced within Europe itself, with deep tech accounting for approximately 44 percent of all tech investments in 2023, an increase of 18 percentage points since 2019. These developments are building credibility for Europe's vision of becoming a global leader in deep tech.Deep tech investments have been delivering strong returns, particularly when compared to traditional tech sectors. Since 2003, deep tech investments have consistently outperformed traditional tech, delivering a superior net annual average internal rate of return (IRR) of 16 percent after all fees and costs, compared to just 10 percent for traditional technology investments. This performance is attributed to several factors, such as lower competition, founders with significant technological knowledge, opportunities in large markets, higher patent generation, and a unique life cycle.

Defining Characteristics of Deep Tech

Deep tech is a dynamic and ever-evolving sector with several defining characteristics. It focuses on large-scale breakthroughs or pressing societal challenges, such as AI or space exploration, and aims to provide solutions to global issues like climate change and energy transitions. It operates on a global scale, with ventures typically operating in worldwide markets. Deep tech ventures also have a high R&D intensity, with substantial investment directed towards technology development, often related to hardware. The founding teams typically consist of individuals with advanced technical backgrounds, often from academia or corporate R&D. Additionally, deep tech initiatives generally require significant funding from large and specialized investors, as well as specialized equipment and skills.

Deep Tech Segmentation and Investment Areas

Deep tech is segmented into eight investment areas, each marked by recent technological breakthroughs. These areas offer a wide range of opportunities for investors and entrepreneurs alike. The continuous evolution and innovation within these areas are driving the growth of the deep tech sector and creating new possibilities for the future.

Deep Tech vs. Traditional Tech: Performance and Myths

While the performance of individual funds varies in deep tech and regular tech, deep tech funds have, on average, generated outsized returns. Investments in deep tech outperform those in traditional tech, producing an average net IRR of 17 percent compared to 10 percent for traditional tech funds. However, deep tech is frequently shrouded in misconceptions. Myth 1 suggests that failure rates of deep tech start-ups are much higher than those of other tech start-ups, but in reality, they are similar in the later stages. Myth 2 claims that deep tech ventures have longer funding cycles and slower exit timeliness, but this is not always the case. Myth 3 states that deep tech ventures are less likely to achieve unicorn status, but recent research shows otherwise. Myth 4 argues that deep tech start-ups are less capital efficient, but in fact, they demonstrate superior capital efficiency due to significant funding from non-dilutive sources.

How Europe Can Capture Value from Its Deep Tech Ecosystem

European deep tech is becoming more prominent both regionally and globally. The share of deep tech funding for European ventures has nearly doubled from approximately 10 percent in 2019 to 19 percent in 2023. Regionally, deep tech now represents a significantly larger portion of the overall European VC tech funding, increasing from about 10 percent in 2010 to 44 percent in 2023. This growth is driven by technological breakthroughs and societal demands, such as addressing the climate crisis and energy security.European investors have a lot of untapped opportunity in the deep tech sector. Despite having robust foundational capabilities in research, manufacturing, and development, the region has a risk-averse investment culture and a fragmented market. To fully capitalize on Europe's deep tech potential, European VCs and corporates need to focus on engaging with the broad deep tech ecosystems, adapting VC strategies to the deep tech sector, and building stronger partnerships with deep tech start-ups.

Engaging with Deep Tech Ecosystems

In traditional technology realms, the partnership between the founder and the VC is often sufficient. But in deep tech, VCs need to tap into two types of ecosystem: funding and enabling. The funding structure often blends public and private financing and is closely linked to local industry funding. Deep tech companies also need to work with universities, professors, governments, accelerators, and incubators to access the specialized knowledge and resources needed to overcome technical hurdles and secure funding.

Adapting VC Strategies to the Deep Tech Sector

VCs need to apply their traditional capabilities in investing and building up start-ups to deep tech. But they also need to build additional capabilities, such as clarifying their rationale and constraints, developing expertise in the field, and building up an orchestration capability. By doing so, VCs can more effectively bring their own capabilities to bear and support the growth of deep tech start-ups.

Building Stronger Partnerships between Corporations and Deep Tech Start-ups

As deep tech's importance increases, corporations need to rethink their approach to engaging with deep tech start-ups. Successful partnerships should focus on holistic engagement, including collaborations, acquisitions, or investments in the deep tech VC ecosystem. By building up an ecosystem of partners, from VCs to corporations to universities to governments, Europe has an opportunity to lead the field and build value for the region.