The U.S. invents, Asia builds, and Europe regulates. At least that’s how the saying goes. As of late, however, European investors have raised concerns over the problem of connecting innovation to commercialization across the eurozone in an apparent attempt to alter the block’s plotted course.
In a recent piece in business daily Dagens Industri, representatives of a European engineering collage’s VC arm argues that part of the struggle for European ideas to reach viable commercialization is the “disconnect between the lab and the market” which in turn is due to a failed resource allocation to the deep tech sector. Whilst the issue is indeed correctly identified, the solution proposed - forced capital injection through state sponsored entities - is counterproductive.
European tech investors are starting to awake to the issues faced when attempting to bring to market the research and innovation. Ben Schreckinger opined on the matter in a recent article in Politico where he argued that
“[E]ven among those who welcome tighter cooperation, not everyone sees venture funding as the best use of public money in the defense-tech space […] a government has more dollar-for-dollar clout as a buyer than as an investor.”
Although aimed at defense innovation, this statement is equally true for the deep tech sector. Successful models of spin-out venture-building - both in the U.S. and in Asia - cited by European VCs as model cases are built on the deployment of private capital first and private capital alongside state entities second. Europe nevertheless refuses to align its interests with proven models, instead choosing to launch VC fund after VC fund sponsored by taxpayer dollars, bound by restrictive investment mandates, and immobilized by general partnerships that lack both cohesion and experience.
To foster continued innovation in the Eurozone require - in my mind - one thing above all: long-term commitment to founders.
By this, I do not mean that investors should push their exits (such a change would necessitate a rethink from both GPs and LPs and effectively limit European VCs access to capital). Instead, Europe should leave investing to the pros and re-focus government on paving the way and setting up private enterprises for success in the long term.
Countries like Sweden - which recently topped the list of most innovative EU countries - have created ecosystems in which starting to build a company around an innovative idea is easy. The cost and risk of embarking of a commercial venture in Europe, and especially Scandinavia - is very low compared to other global innovation hubs. Where the European systems oftentimes fails, however, is when these companies leaves the incubation phase and reaches a state of relative maturity. Here, the famed European red-tape really kicks in. Companies that - in the word of a particular U.S. founder - wishes to “move fast and break things” are faced with either actively constraining their growth or taking their enterprise overseas. The block has lost promising unicorns this way (Dataiku, Algolia, Kyribam and Aircall comes to mind).
So what are some solutions? Let’s begin with what is not: direct government sponsorship. This is, in fact, good news. It is much harder to create innovation out of thin air than it is to pull back on government intervention and Europe has plenty of both.
EU lawmakers should continue to support early innovation (e.g. financial support to the block’s highly-ranked state research universities and spin-out ecosystem), stop interject themselves in the investment process (the expertise sits in the private sector), and start work on the runway on which European deep tech startups can comfortable scale and grow in the union (limiting the need for maturing companies to move overseas and the associated brain-drain and innovation loss).