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Missing the Boat to the Valley of Death
28 Nov, 2019

As we prepare to leave the European Union, a £3.5 billion fund to provide equity and grant funding for start-ups in so-called deep tech industries is about to be launched. Andy Pye, technical writer and L4E Secretary is trying not to cry.

 

Data is influencing our lives in ever-more innovative ways, and there are exciting innovations in the manufacturing and automation sectors where I spend most of my working life. Data being collected from pumps and gears and other engineering devices is fed back to provide predictive information on when they are likely to fail, saving on spares stocks and machine downtime.

London is a powerhouse of tech start-ups, the majority in the financial technology (fintech) sector. For the uninitiated, this is the technology and innovation that aims to compete with traditional financial methods in the delivery of financial services. The use of smartphones for mobile banking, investing services and cryptocurrency are examples. Financial technology companies consist of both start-ups and established financial institutions and technology companies.

Let me declare an interest: I'm involved in a start-up company myself. As a passionate cricketer, I'm delighted to be involved with a little magnetic sensor that fits on the end of a cricket bat and measures the motion of the batting stroke as it impacts the ball, providing invaluable information for coaches and serious cricketers.

As part of the process for establishing this device in the UK market, and securing further funding for later developments, I have spent time at Canary Wharf talking to various sources of funding for tech start-ups. These people talk in very large numbers of zeros!

While London will remain a centre of excellence for start-ups, the spectre of Brexit has already increased competition from other European centres. Berlin is particularly noteworthy, but other developing centres of start-up expertise include Paris and Luxembourg.

French billionaire Xavier Niel thinks Paris could take over as the start-up leader in Europe. Niel opened the doors of a start-up mega-campus in Paris in June 2017, called Station F, which plans to house 1000 start-ups under its 1920s glass arcades.

France's tech ecosystem is benefiting from the scrapping of a wealth tax on all assets other than property, a flat tax on dividends and an easier process to wind down companies. The most important change, according to the French tech industry, is the creation of a special tech visa, making it easier for the sector to import talent.

In the first half of 2019, French start-ups raised a record €2.79 billion, up 43% on the previous year, and the size of their fundraises is increasing. France is behind the UK, which raised €5.30 billion (+75%) but ahead of Germany, which raised €2.47 billion (+4%).

Tom Chi, the co-founder of Google X, the secretive division behind projects such as Google Glass, the internet-connected glasses, and Google’s self-driving cars programme, believes Brexit could allow Berlin to take over from London as Europe’s technology powerhouse. Chi says that creating barriers, such as restrictions on the movement of people from the EU, will hamper Britain’s success in the technology sector. “We are seeing the rising of all these isolationist attitudes and obviously Brexit is happening,” he said. “The two big tech centres in Europe are London and Berlin. Post-Brexit I see the balance of power tipping to Berlin."

Regardless of where the start-ups will be based, Bloomberg is reporting that the European Union is planning a EUR 3.5 billion fund that will invest in early stage technology in an effort to increase the pipeline of innovations that might someday take on giants in the US and China.

According to Jean-Eric Paquet, the European Commission’s director general for research and innovation, speaking at the Slush Technology Conference in Helsinki, traditional venture capital firms typically don’t fund the famous innovation "Valley of Death” - this is where science has produced a breakthrough, but a costly and risky research and development phase is still needed before a product could become viable.

"The fund will seek to close that investment gap by providing equity and grant funding to early stage firms in so-called deep tech, such as manufacturing, biotechnology, health-tech and artificial intelligence," Paquet said. “We are hoping to make a big, big impact with this European Innovation Council. We are emulating indeed to an extent the positive features of traditional venture capitalists.”

The fund is set to launch formally in 2021 and will be run by the European Innovation Council, though the final size could change depending on the outcome of budget talks with the bloc’s member states. But a pilot phase of the EIC started this summer with a EUR 600 million pool of capital to test the appetite of innovators for combined grant and equity support. The pilot is set to decide on between 50 and 100 projects by the end of the year.

The EIC’s fund will be run by external experts who will be required to conduct due diligence and find other participants for a more traditional round once a product moves into a phase where it can be tested.

“The European Commission’s approach to investment in deep tech is, in my view, very thoughtfully designed, laser focused on areas that are not yet viable for venture capital investment,” said Sarah Cannon, a San Francisco-based partner at Index Ventures, a venture capital firm that has invested in European companies, such as payments firm Adyen NV and mobile game maker Supercell Oy.

Such a shame that UK start-ups will be missing at the table and be ineligible for a share.

London4Europe blogs are edited by Nick Hopkinson, Vice-Chair. Articles on this page reflect the views of the author and not necessarily of London4Europe.