Europe’s Deep Tech Dilemma: Why Capital Isn’t Enough
Europe isn’t lacking funds for innovation; it’s grappling with a more fundamental issue: the ability to strategically deploy capital into areas poised for long-term growth – specifically, SciTech startups. This disconnect shapes the continent’s innovation landscape and even Sweden’s celebrated success in producing unicorns per capita doesn’t mask a deeper structural weakness.
The Draghi Report and the Urgency of Competitiveness
The recent Draghi report highlighted Europe’s declining growth compared to the United States and China, underscoring the need for increased competitiveness. In a world facing geopolitical instability, climate change, and rapid digitalization, This represents no longer simply an economic goal, but a strategic imperative.
Beyond Unicorns: The SciTech Gap
While Sweden’s tech ecosystem is thriving – Swedish startups raised €2.4 billion in 2024 – much of this success is concentrated in fast-scaling, business-to-consumer (B2C) ventures. SciTech startups, focused on advanced materials, semiconductors, life sciences, and energy systems, face significant hurdles in their early stages. This creates a paradox: celebrating innovation while simultaneously under-resourcing the ventures most critical to Europe’s future.
The Myth of a Capital Shortage
Contrary to popular belief, a lack of funding isn’t the primary obstacle. McKinsey & Company research demonstrates that deep-tech funds have generated average net internal rates of return of 17%, exceeding the 10% seen in traditional tech funds. Deep tech operates in less crowded markets, generates more patents, and targets large, underserved industries. Despite these returns, investors often hesitate at the earliest stages.
The Confusion of Risk and Uncertainty
A core issue is the conflation of risk and uncertainty. Investors are adept at evaluating commercial risks like market competition. However, technological uncertainty – whether a scientific hypothesis can be scaled, a reactor design stabilized, or a fresh material performs as predicted – requires a different approach. It demands structured analysis and technical competence before capital commitment. Too often, investors defer responsibility, seeking “market entry” or “lead investor validation,” effectively delaying crucial judgment.
The “Pitch Paradox” and the Need for Validation
This deferral creates a dependency cycle, slowing down promising ventures or forcing premature acquisition by foreign entities. Industrifonden’s recent deep-tech funding landscape report identifies a “pitch paradox”: complex technologies are difficult to communicate to generalist investors, making early validation essential. Grants, publications, and specialist investors become credibility signals because analytical competence is scarce.
Lessons from Silicon Valley
The formative decades of Silicon Valley offer a valuable lesson. Early investors, like Tom Perkins with Genentech, didn’t reject proposals based on technological uncertainty. Instead, they financed the analytical process to reduce that uncertainty, hiring external specialists to test assumptions before investing. This was supported by legal and fiscal structures rewarding long-term commitment.
The Erosion of Long-Term Incentives
Europe hasn’t replicated these conditions. Capital gains systems rarely differentiate between short-term speculation and long-term SciTech investment. Sweden historically rewarded long holding periods with lower capital gains taxes, recognizing that patient capital is fundamentally different. This distinction has largely disappeared, diminishing incentives for the long-horizon engagement deep tech requires.
The Limits of Public Funding
While government venture vehicles and EU co-funded programs play a role, they don’t address the core problem: a lack of competence within the capital itself. SciTech ventures need investors capable of dissecting uncertainty, not simply diversifying financial exposure.
Building a Competent Ecosystem
Addressing this requires systemic changes. Capital gains taxation should reward long-term investment in early-stage ventures. Flexible corporate forms, similar to US LLCs or EU special purpose vehicles, should accommodate the unique financing structures of SciTech companies. Milestone-based stock option schemes should incentivize both employees and external specialists. Crucially, we need durable financing chains that support ventures from lab breakthrough to IPO, rather than relying on repeated public funding injections.
A Call for Urgent Reform
Europe’s geopolitical challenges, climate ambitions, and digital competitiveness depend on SciTech innovation. Sweden’s entrepreneurial talent is evident, but talent without aligned incentives is wasted. Modernizing our frameworks with urgency is essential if Europe aims to lead, not follow.
FAQ
Q: Is the problem solely about funding?
A: No, while funding is important, the core issue is the lack of analytical competence among investors to assess the unique risks and uncertainties of SciTech ventures.
Q: What is the “pitch paradox”?
A: The “pitch paradox” refers to the difficulty of communicating complex technologies to generalist investors, making early validation and specialist expertise crucial.
Q: What role does government funding play?
A: Government funding can support infrastructure and early validation, but it doesn’t solve the fundamental problem of a lack of competent investors.
