Europe’s system of supporting groundbreaking innovations is broken. We are at dawn of a new technological wave in which digital technologies are beginning to revolutionize the world of physical products, just as they revolutionized services over the past 15 years. Given its world-class science and engineering, Europe should be well positioned to benefit from this trend. The reality is different, however. If a European researcher invents a truly transformational physical technology but is not based in a handful of locations such as Cambridge, she or he stands almost zero chance of being able to convert it into a globally competitive company.
First, Europe has a serious structural problem with access to financing for early stage, science and R&D-based companies (“deep tech”). This is in spite of massive funding that governments across Europe provide for research and development (R&D) – more than 100 billion euros every year. They give out much of it in the form of grants designed to support applied research and development, i.e. activities that should result in practical applications in the form of new products and services.
The problem is that most of this money does not end up in new companies that are typically the drivers of disruptive innovation. Much of it is instead channeled into established organizations from both the private and public sector that just know how to play the public R&D money game.
Even when a young technology champion manages to secure some of this funding, public money does not help it with the most important success factor – practical capabilities in developing a real world business. This requires people who have extensive experience with building companies, as well as industry specific expertise and connections. Generally speaking, such people are very hard to find outside of the world’s best technology locations. The best way to get them involved in a nascent company that was not born in one of these places is through private “smart money”, such as venture capital. However, that’s an even bigger problem in Europe.
Even though venture capital investing in Europe grew by 77% in 2014, almost none of it targets deep tech start ups. As a result, no matter how great their technologies are, it is extremely difficult for such companies to get seed funding (at the order of 200,00 EUR to 2 million EUR) and practically impossible to get Series A or B funding (anywhere between 3 and 10 million EUR.)
Standard venture capital invests so little in deep tech because of structural reasons. First, science-based companies carry an inherent technology risk: sometime a technology that performs perfectly well in a lab just does not work at an industrial scale; or a drug that seems to work miracles in mice does not have any real effects in people. Second, scientific geniuses are not necessarily outstanding and experienced entrepreneurs. As a result, investors need to be significantly more involved in they daily business of a deep tech company than in an a software or internet start up. That limits the number of deep tech companies in which they can invest concurrently. Third, science and R&D-based start ups usually require more capital, especially in early stages of the company life, when the risk is at its highest. Finally, compared to software or internet start-ups, deep tech companies usually need a lot more time in order to bring their products to market.
All these factors make investing in deep tech enterprises significantly more difficult and risky than investing in “digital”.
So how can we get the Europe’s deep tech start ups rolling? Realistically, the problem can only be solved through a smart collaboration between the private and public sectors. The public sector needs the private sector to help it identify the most promising technology companies and to provide continuous support for the development of their businesses. It just does not make sense for governments to channel large grants into applied R&D that stands little chance of being commercially successful. At the same time, the private sector needs the public sector to help it address externalities and structural risks involved in investing in science and engineering. Outside of extremely developed technology hubs, such as Silicon Valley or Cambridge, private capital will not rush into deep tech investing without public support that would bring risk levels to those comparable with investing in digital start ups.
With more then 100 billion euro funneled by European governments into R&D, money is clearly not a problem. A properly designed instrument with even 1% of that amount, providing easy-to-use grant co-financing for smart private money investments in science and R&D-based companies could make miracles happen. And what better time to do it than now. After all, doesn’t the new Juncker Plan for boosting EU’s economy target exactly the same goals: investing in Europe’s most promising projects and companies in a way that would mobilize private co-funding and drive Europe’s competitiveness through innovations.
Author: Martin Bruncko is a deep tech entrepreneur and investor, as well as a former Slovak junior minister for innovations and former Head of Europe at the World Economic Forum. He is also a Young Global Leader.
Image: Pipettes are placed near a rat brain sample for an experiment in a lab of the Blue Brain Project at the Brain Mind Institute of the Swiss Federal Institute of Technology (EPFL) in Ecublens, near Lausanne May 9, 2011. REUTERS/Denis Balibouse