Deep tech funding in the new era
Deep tech companies have become a central part of the overall start-up ecosystem in Finland as well as in rest of Europe. The definition of deep tech is somewhat fluid but typically we refer to companies and business models based on important scientific or engineering innovation, creating strong barriers to entry. These companies are important not only for creating economic growth and employment, but also for addressing some of the most fundamental societal problems we face, including climate change.
Investors consider deep tech companies quite different from the mainstream of VC funded companies in areas like Software-as-a-Service (SaaS), FinTech and Business-to-Consumer models. For instance, there are specific challenges in deep tech investing related to picking the winners as well as creating and capturing value. Long-lived perceptions of capital intensiveness and long commercialisation cycles seem to hold true according to our research. By sampling 250 Finnish deep tech companies – which in our view represents the entire population of growth-minded deep tech companies in Finland – we found that it takes on average seven years for the whole company population to grow cumulative revenues greater than cumulative funding. Only one company has surpassed the EUR 10 million mark within five years from founding and the typical “power law” effect is evident as 10% of companies account for 90% of total revenues.
So, patience is certainly a virtue in deep tech investing. On a positive note, commercialisation seems to have been picking up speed in recent years as the ecosystem has matured, and from an investor’s perspective revenue is not the only (and perhaps not even the most important) proxy for value creation in deep tech. It is not unusual for an early-stage European deep tech company to command an exit value in the hundreds of millions, if market dynamics and the strategic agenda of corporate acquirers are aligned with the target.
Funding volumes of deep tech companies have soared recently in Finland and rest of Europe. By the end of September 2022, more than EUR 350 million had been invested into Finnish deep tech companies, already beating the capital pools of previous years. As usual, volumes are driven by a few flagship companies such as Iceye and IQM who both have announced fundraisings above EUR 100 million this year.
The environment is changing, however. There are currently many market forces pointing to a downward direction in terms of capital supply for deep tech companies. Public market and IPOs, which in recent years have been an important source of capital even for early-stage deep tech companies, have effectively for the time being. VC funds seem to have even more selective and cautious in new investments in response to a cooling valuation environment.
By the end of September 2022, more than EUR 350 million had been invested into Finnish deep tech companies, already beating the capital pools of the previous years.
Yet, the opportunity for investing in deep tech has not disappeared. On the contrary, many factors speak in favor of deep tech becoming even more important investment category going forward. Firstly, as mentioned before, many deep tech products and business models are contributing to mitigating climate change, directly or indirectly. This imperative is getting stronger by the day. Secondly, the adverse geopolitical developments and national security concerns have changed our perceptions on dual use technologies, affecting sectors like space tech, quantum, and cybersecurity. We have also realised that supply and availability of certain critical digital components and infrastructure cannot be taken for given, which increases the need for technological sovereignty.
Capital is not the only constraint to the development of our deep tech ecosystem. Talent acquisition and development are probably at least equally important. However, to address this potentially widening gap between capital supply and the imperative to secure the competitiveness of Finnish and European technology ecosystems, it is vital to maintain and develop a fruitful environment for funding deep tech companies.