From downturn to upswing? Positive outlook for deep tech companies

Finnish deep tech companies have had every reason to be cautiously optimistic this year. A recent report by Tesi reveals that the sector’s financial situation is bottoming out. Companies have so far raised a total of EUR 363 million in venture capital, an increase of over forty per cent compared to 2023

Last year, we estimated that Finnish deep tech companies would need about half a billion euros in funding in order to remain on their growth trajectory. As things now stand, it seems that this amount can still be reached before the end of the year.

The sector’s growth figures have been boosted in particular by several large funding rounds, such as the substantial investments raised by ICEYE, Onego Bio, Enifer and Infinited Fiber.

The path to growth for deep tech companies is notoriously slow and often requires significant capital. The fruits of long-term work are now being reaped as top Finnish companies, such as ICEYE, Oura and Bluefors, are well on their way to becoming market leaders in their field.

The combined net sales of Finnish deep tech companies exceeded one billion euros in 2023 for the first time in our review history.

Geopolitical instability has impacted Finland’s deep-tech investment environment. Dual-use technologies are more prominent in the deal flow of Finnish investors and, partly for this reason, investors are eyeing space technology and quantum technology on perhaps a broader front.

Early-stage funding available, later stage challenging

Early-stage funding is reasonably well available, and interest in deep tech seems to be well established. Some major early-stage funding rounds have been raised. These include Steady Energy, a developer of small-scale nuclear power, quantum computing company QMill, and Flow Computing, a company revolutionising the processor technology of classical computers.

However, later-stage fundraising remains a formidable challenge. Finnish investors are thin on the ground, so international investors play a key role. In times of instability, international venture capital investors typically withdraw from “peripheral markets” such as Finland. This has presented hurdles in the Finnish startup scene this year and last year more generally, as highlighted in a recent survey by FVCA (Finnish Venture Capital Association).

Not all prospects are bright for deep tech companies, though. The number of bankruptcies has increased since 2022, and new companies are not being created at the same rate as existing companies close down. Although bankruptcies are commonplace in startup life, the volume of companies founded and closed is a concern.

Steps towards growth

Finland’s deep tech ecosystem has many strengths: high-quality research is carried out in Finland, our society is relatively stable, public funding is at a relatively satisfactory level, and the Finnish venture capital sector has grown exponentially over the past ten years.

Nevertheless, a reasonably good situation is not sufficient as a final goal for a small peripheral market like Finland. Not if we want to continuously grow international deep tech success stories here. I have listed below some of the ways in which the Finland’s investment market could step up to the next level:

1. We have world-class research skills, but the path from idea to business activities is too long and needs to be shortened.

2. Later-stage financing must be secured so that the race for global market leadership does not falter for lack of growth funding. Finland’s Slush event has been an excellent channel for attracting international later-stage investors to Finland, but also Finnish VC funds investing in later-stage deep tech need to be created.

3. There is room for bolder ambition. Not every deep tech company needs to aim to for unicorn status within a few years. That said, I believe that Finns’ characteristic modesty should not hinder the commercial planning of companies. In my view, many existing deep tech companies are fully capable of pursuing an even more ambitious market opportunity.

4. A rational balance between public and private money. At least in Europe and the USA, the financing needs of the best deep tech companies planning to scale commercially are rarely solved by either the public or private sector alone. Efficient use of EU funding is also important in this scenario.

Regardless of the challenges, the industry has a promising future. There are several interesting companies in the deal flow of investors, and I forecast that next year’s investment volume in Finnish deep tech companies will exceed this year’s, possibly even by a substantial margin.

Samppa Sirviö
The author is an Investment Manager in Tesi’s Venture Capital team