Why traditional venture capital is struggling with deep tech — and potential solutions.

      The future of deep tech in Europe relies on developing new investment strategies. Traditional funding models struggle to meet the long-term financial requirements essential for innovation. There exists a European paradox where, despite significant scientific research, a focus on quicker commercialization and short-term objectives hinders the region from fully unlocking the potential of deep tech. While startups provide valuable support, Europe still trails behind the US and Asia in transitioning breakthroughs from the laboratory to the marketplace.

      To remain competitive, Europe must enhance technologies such as AI, robotics, synthetic biology, and quantum computing, which are central to the deep tech industry. These technologies not only offer profit potential but can also lead to transformative changes in the world, such as cochlear implants restoring hearing and advancements in aerospace engineering enabling Mars missions. However, these developments require patient, long-term investment in science, engineering, and design.

      Startups that focus on fast-deploying SaaS or consumer applications can quickly commercialize and attract early funding. In contrast, deep tech requires extended development timelines often exceeding a decade, with high initial costs and greater risk tolerance than traditional software endeavors, creating a "valley of death."

      It is important to investigate which emerging funding models are effective and gaining traction in Europe. Drawing from insights at Zubr Capital, this analysis highlights the real opportunity for Europe to capitalize on deep tech and regain lost market share, rather than allowing its startups to relocate to established financial hubs like the US, Asia, or Israel.

      Challenges for traditional VC in deep tech

      Conventional software startups usually follow a well-known funding cycle: raising a 10-year fund, deploying capital over three to five years, and seeking profitable exits within five to seven years, with criteria for success based on rapid growth and scalability with lower capital requirements.

      Deep tech cannot fit into this conventional financial structure. Startups in this space require lengthy development cycles, often hindered by strict regulations in sectors like healthcare, energy, and aerospace, which demand extensive certifications and tests. Generalist VCs seldom venture into these areas due to the need for patient capital.

      Many deep tech companies must meet specific industrial and geographic benchmarks. For example, a French aerospace firm may lack the infrastructure to access traditional funding similarly to a large US company like Delta.

      Conventional investment models pose several barriers for deep tech firms, such as:

      - Pressure to achieve visible traction pushes startups to shift from deep tech to more commercial projects.

      - Traditional VCs often lack the requisite expertise to accurately assess complex projects.

      - Funding in Europe tends to be smaller for both initial and long-term costs.

      - There exists a "valley of death," making it difficult for deep tech to secure public funding for R&D.

      - EU investors are often risk-averse, influenced by the stigma surrounding failure.

      - Industry fragmentation, with various markets, regulations, and bureaucratic challenges, impedes funding.

      - Foreign investments often take over in late-stage funding, frequently relocating technology abroad.

      Additionally, deep tech leaders typically require a more extensive education — about five to seven years compared to two to three years for traditional startup leaders — due to the subject matter's complexity. A significant 81% of deep tech founders feel that European investors lack the understanding necessary to fully grasp their projects or objectives.

      Moreover, the funding available is largely insufficient. A European fund managing €150 million can write a few checks of €10 to €15 million, which is inadequate for financing complex projects like a gigafactory or scaling a new fusion plant. This mismatch between traditional VC funding and deep tech in Europe leads to systematic underfunding, stalled startups, and the potential loss of groundbreaking innovations. There is a trend of foreign entities like Amazon, Facebook, and Microsoft acquiring European tech talent to integrate into their R&D sectors, further hindering the progress of European deep tech.

      Examples of VC failures in deep tech

      The concept of mismatched VCs is not merely theoretical; real-world examples exist where funding failures have resulted in Europe losing deep tech opportunities to global competitors:

      - **Prophesee in France**: This company develops neuromorphic vision sensors that allow machines to replicate human vision. Despite raising €126 million over multiple rounds, Prophesee entered judicial recovery in October 2024 after failing to secure further funding. Although recognized globally for its technical validation, financing complications hindered its development progress.

      - **Mycorena in Sweden**: After initially holding promise with mycelium-based protein applications, Mycorena filed for bankruptcy when it could not secure Series B funding in the mid-2020s, ultimately being sold for a minimal amount, highlighting the struggles deep tech companies face in scaling.

      - **Blickfeld in Germany**: A leader in LiDAR technology for autonomous vehicles, Blickfeld raised €68 million, including €15 million from the European Investment Bank. However, the company filed for insolvency in June 2024, as revenue growth failed to meet the requirements of patient capital.

      There are numerous other examples of investment shortcomings