The financing bottlenecks for Finnish science- and research-based deep tech companies are tightening
Tesi’s (Finnish Industry Investment) latest study reveals that Finnish deep tech startups and growth companies are facing financing challenges. Investment rounds have shrunk in size as international investments slowed in pace, while delays are already apparent in ongoing financing rounds. A cautious estimate of next year’s financing needs is around half a billion euros.
Finnish deep tech companies had raised €180 million in investments by the end of October this year. Companies such as Wirepas (€22 million), Norsepower (€28 million) and Paptic (€23 million) have secured funding. Tesi is an owner in both Wirepas and Norsepower.
There is a marked change in the capital raised compared to the previous year. During 2022 altogether €432 million was raised in financing. Several large investment rounds account for such a high figure in 2022: ICEYE’s €118 million, IQM’s €128 million and Varjo Technologies’ €75 million.
“This year there hasn’t been a single large investment round in the range of tens or even hundreds of million euros. This conforms to an international trend,” comments Juha Lehtola, Tesi’s Director, Venture Capital.
Growing a deep tech company is often capital-intensive right from the start because the costs of R&D, and later the costs of constructing production facilities, are high compared to, say, software development.
Finnish venture capital funds have raised investable capital quite successfully in earlier years, so seed financing for promising early-stage companies is sufficient. For companies in later stages of growth, though, finding future growth capital may be more difficult as the challenging economic climate has persuaded many international investors to withdraw. The average investment by Finnish venture capital funds in deep techs ranges from 2 to 3 million euros.
An international investor has taken part in almost all the larger investment rounds. Larger international investors often act as anchor investors in funding rounds.
“To scale growth, capital is needed, and Finnish venture capital funds alone may not have broad enough shoulders for funding rounds of tens of millions euros. Finding financing is crucial, though, because the need for solutions that transform energy production, materials and industry has not disappeared,” says Tuomas Rekonen, Investment Manager at Tesi.
The deep tech ecosystem is under pressure on both sides; apart from insufficient financing for growth, new entrants are being established at a slower pace. In the peak year of 2016, altogether 30 deep techs were established in Finland, and last year only half that number. This year’s statistics show only two newly founded companies.
“The newest entrants don’t necessarily show up in the statistics yet, so conclusions about their final number still cannot be drawn. The overall picture is worrying, though: fewer companies are being founded, and at the same time there is insufficient growth capital for companies in more advanced stages,” continues Rekonen.
Half a billion euros in financing needed next year
For the first time, the review now estimates the future need of deep tech companies for growth financing. The estimate is based on a typical deep tech development horizon and on the funding needs associated with different growth stages.
“Deep techs cover a broad spectrum of businesses with varying funding needs. However, based on the companies that have been funded in recent years and the stages of growth they are in, we have estimated that Finnish deep techs seeking growth will need at least €450–650 million euros in growth funding next year,” says Rekonen.
A slowdown in ongoing funding rounds can also be seen in the market, and this is reflected in this year’s investment volumes.
“Next year will be crucial – there’s less international money on the move, but the need for funding is plain to see. It’s essential to ensure that these companies find funding for growth. This is a group of companies developing critical future technologies, growing their net sales, and offering the prospect of promising export potential,” says Lehtola.
“On the other hand, the more challenging financial situation can offer excellent investment opportunities because some good companies are taking part in fundraising. There are companies in the deep tech sector that even during this year have significantly increased their net sales,” concludes Lehtola.
The review covers 281 Finnish deep techs hand-picked by Tesi’s experts in collaboration with VC investor Voima Ventures, VTT Technical Research Centre of Finland and Business Finland. The criteria for selecting companies are: 1. A focus on science and research 2. Strong technology giving a competitive edge 3. The company operates at the forefront of technology. The companies are divided into six categories: new materials; digital infrastructure; energy & environmental technology; optics; artificial intelligence & robotics, and health & biotechnology.
For more information about the review:
Juha Lehtola, Director, Venture Capital
juha.lehtola@tesi.fi
+358 400 647 671
Tuomas Rekonen, Investment Manager
tuomas.rekonen@tesi.fi
+358 40 7540 660
Contact for communications:
Saara Vettenranta, Communications Manager
saara.vettenranta@tesi.fi
+358 40 723 3516
Tesi (officially Finnish Industry Investment Ltd) is a state-owned, market-driven investment company that invests in venture capital and private equity funds and directly in Finnish startups and growth companies. tesi.fi | X (Twitter) | LinkedIn | Uutiskirje