Why traditional venture capital is struggling with deep tech — and how it can be improved.

      Europe's deep tech future relies on transforming investment strategies. The reason for this is that traditional funding models fail to meet the long-term financial commitments required by innovation. There exists a European paradox where, in spite of significant scientific research, early commercialization efforts and a focus on short-term objectives hinder the region from fully tapping into the potential of deep tech. While startups offer strong support, the sector continues to trail behind the US and Asia in translating breakthroughs from the lab into marketable products.

      To keep the industry competitive, Europe must develop technologies such as AI, robotics, synthetic biology, and quantum computing, which are central to the deep tech sector. These technologies are not only lucrative; they have the potential to revolutionize the world, from cochlear implants that restore hearing to aerospace engineering that facilitates missions to Mars. However, these advancements require patient, long-term investments in science, engineering, and design.

      Startups focused on quickly deployable SaaS or consumer applications can commercialize rapidly and attract early funding. In contrast, deep tech operates under different circumstances: there is a “valley of death” caused by lengthy R&D cycles, significant initial costs, and a greater risk appetite than typical software ventures.

      It is important to explore which new funding models are emerging and how they are beginning to gain traction in Europe. Drawing from insights gained at my investment practice, Zubr Capital, this evaluation looks at the real opportunity for Europe to capture deep tech advancements and regain lost market share, instead of allowing its startups to relocate to more mature financial ecosystems such as those in the US, Asia, or Israel.

      Challenges faced by traditional VC in deep tech

      The current landscape of EU tech includes updates from the sector, commentary from our founder Boris, and some questionable AI-generated artwork. It’s free and delivered weekly to your inbox. Subscribe now! Traditional software startups typically adhere to a familiar funding cycle. They establish a 10-year fund, deploy the raised capital over three to five years, and aim for profitable exits within five to seven years. A successful funding cycle for these startups hinges on rapid growth, scalability, and relatively low capital requirements.

      Deep tech, however, cannot operate within this conventional financing framework. Startups in this category often require development cycles that extend beyond a decade. Fields like healthcare, energy, and aerospace come with stringent regulations necessitating numerous certifications and tests to validate advanced capabilities. Generalist VCs tend to shy away from these areas due to the need for patient capital.

      Many deep tech companies must navigate specific industrial and geographical challenges. For example, a French aerospace company may lack the infrastructure to utilize traditional funding as effectively as a US giant like Delta.

      Established investment models pose several challenges for deep tech firms, such as:

      - Pressure for visible traction leads startups to shift from deep tech to more conventional projects.

      - Traditional VCs frequently lack the needed expertise to accurately assess complex projects.

      - Europe has relatively smaller funds available for upfront and long-term costs.

      - There exists a “valley of death” for deep tech companies reliant on public funding for R&D.

      - EU investors tend to be risk-averse due to the stigma surrounding failure.

      - Industry fragmentation, with varying markets, regulations, and extensive bureaucracy, complicates funding.

      - Foreign investments often dominate late-stage rounds, typically taking the technology to other countries.

      Another significant issue in deep tech is the dependency on education. A typical startup leader may have two to three years of higher education, while deep tech initiatives often require five to seven years due to their complexity. A striking 81% of deep tech founders feel that European investors lack the expertise to truly engage with the intricate details of their projects or objectives.

      Moreover, there simply aren’t enough funds available. A European fund managing €150 million can issue a few checks between €10 million and €15 million, which is insufficient for constructing something as intricate as a gigafactory or scaling a new fusion plant. This disconnect between traditional VC funding and deep tech in Europe leads to systemic underfunding, stalled startups, and lost groundbreaking innovations. There is a history of external entities, such as Amazon, Facebook, and Microsoft, acquiring European tech talent to enhance their R&D sectors. These losses hinder Europe’s deep tech progress.

      Real-world instances where VC fails deep tech

      The concept of mismatched VCs is not merely theoretical; numerous real-world cases showcase funding failures that have caused Europe to miss out on deep tech opportunities to global competitors. Here are several examples:

      - Prophesee in France: This company develops neuromorphic vision sensors that enable machines to replicate human sight. Prophesee raised €126 million across various funding rounds but entered judicial recovery in October 2024 due to its inability to secure further funding, despite receiving global recognition for its technical validation.

      - Mycorena in Sweden: The startup, which initially showed promise in mycelium-based proteins applicable in various industries, had to declare bankruptcy as it failed to secure Series B funding in the mid