The UK must reassess what it really means to be a deeptech start up
The UK is losing its reputation as a tech leader. Its focus on incremental innovation and widgets has led to an ecosystem that is devoid of ambition, and a massive disservice to the wealth of academic talent harboured across the country. To harness this talent, and to compete with the capital the US, China, and leaders in Europe are pouring into their sectors, stakeholders in UK tech must clear a path-of-least-resistance for the UK’s most ambitious founders to succeed.
Ambition is far easier to foster in individuals, than it is within institutions. Yet the adage that ‘Europe’s founders aren’t ambitious as those in the US’ still echoes around European tech. It’s absurd to propose that there are such fundamental entrepreneurial differences between founders of these regions. The confidence in their ability to build a multi-billion dollar business, however, is a function of those around them: in academia, incubation, and within venture capital - from inception to IPO.
1. Redefine ‘deeptech’
It is the role of Venture Capital to support a new generation of ambitious entrepreneurs, and enable them to tackle the inherent risks involved with changing the world. Instead of backing incremental improvements and fancy features, they must seek the 200x winners. A future valuation of $1bn should not just be feasible, but probable. Slightly faster grocery delivery is far from a generation defining technology shift.
This was the mindset as the first VCs set out in the US throughout the mid 20th century - funding the future through companies like Intel, Apple, and Microsoft. However, by the time Europe joined the party near the turn of the millennium, strategies had largely flipped towards generating rapid shareholder returns, rather than creating long-term societal value.
This approach does work during market bubbles (see 2021), when there is enough capital floating around for anyone with a pitch deck to raise a funding round. But as investment bubbles become more frequent and more concentrated, the company-flipping VC model falls down. The bottom 25% of VC funds over the past 10 years have generated negative returns to shareholders, compared to just 3% of private equity funds.
The Americans understand it’s about dominating the market of the future rather than playing safe today. It is European VCs that are more likely to say “there’s not enough proof of concept” than “sounds cool, tell me more!” Failing to back truly transformative companies, European VC’s risk averse attitude is shown by its lagging performance.
The average US VC fund returns 10.3% on average over a 10 year period, while UK fund return just 4.6%. And it’s a self-perpetuating cycle. Founders, particularly in Europe, often try to pitch what investors want to hear, fearing that investors will be scared off by big ideas.
This is evident in the rapidly expanding VC landscape in Europe. The number of European unicorns (start-ups with a valuation of $1bn or more) has risen 20-fold in the past 10 years, with the amount of venture capital funding grew 6x over the last decade - outpacing growth in the USA by 50%. However, over the same period, the number of deeptech investors, investing in pre-seed stages, has fallen. EU/UK startups raise 2-times less at seed than their US counterparts. In deep-tech - pushing the boundaries of science and engineering - they raise 4x less. This slows their growth, reduces their chance of dominance, and prevents many of these world-changing ideas from ever reaching the market.
2. Allow startups to fail faster, with more money, earlier
The best investors understand that VC is strongly at the mercy of the power law - that a very small number of investments in a portfolio will generate the vast majority of returns. For our first fund at 7percent, for example, this was OculusVR, which sold to Meta for a 150x return. To optimise this model, and accelerate the rate of success - and indeed the rate of failure - startups need to have the resources to sh*t or get off the pot. When it comes to solving the world’s largest problems, especially if there’s a hardware element, investors need to come in earlier, and with larger tickets. Bill Gates’ Breakthrough Energy program is a great example of how this is done well in the US. The worst thing for any fund, is a company that spends 5-10 years limping towards a technical inflection point, before failing.
3. Bring founders and technical operators into Investment Committees
Part of the problem here is that the European ecosystem is still dominated by managers from corporate backgrounds in finance or law. Very few have the technical background to build a confident thesis behind these technologies, the operational expertise to understand what will be required to build an industry-defining startup, or the amount of capital that will be required.
These managers must also sit on the same side of the table as founders - rather than overestimating their own importance. Unnecessary board seats encumbers progress; board seats should be taken, only where there is a substantial value add. Funds should never charge startups for their services - as many of the EIS funds do - if they want to see these companies scale at optimum speed.
4. Let founders own (and spinout) the company
They should also bear in mind that 50% of nothing is still nothing, and that their role is primarily to fund and support the startup sufficiently to its next round of funding. We need to accept higher valuations at these early stages, so that cap tables don't get diluted at pre-seed/seed, and startups don’t become uninvestable for later stage investors. Founding teams and early hires need the maximum motivation to build and execute as quickly as possible, rather than losing a portion of the pie from day one.
This is the same for universities, when a spinout is formed from academic IP. UK universities take more than double the average equity in spinouts than EU-based universities, four times more than US institutions, and are more likely to lump a representative from their tech transfer office (TTO) onto a board.
5. Incentivise institutional investment
We also need more support from governments and LPs to back the funds that are investing in the determined founders solving the biggest problems. Pension funds, for example, need to be incentivized to allocate more money to frontier technologies, and capitalise on the UK’s academic breakthroughs. The BVCA recently reported that UK VC funds receive 16x less investment than their overseas counterparts. When it comes to institutional investment, Europe remains mostly a region of risk-averse rentiers. It is absurd that foreign investors are more active backers of Europe’s technological future than the region’s own fund managers. It is time for European institutions to commit.
Among its European peers, one place that the UK really stands out is in academia. Of the fifteen European universities in the top 50 universities in the world, as ranked by Quacquarelli Symonds, eight are based in the UK. Cambridge and Oxford take the only two spots in the top five that are not taken by US universities. Historically, this has enabled the UK to build a leading tech industry - the third most valuable in the world after the US and China.
However, with UK funding into early stage startups falling 20% year-on-year, countries like France have seen theirs grow by 8%. Since 2015, the number of French unicorns has grown from four to 36, and it’s telling that Elon Musk chose to speak at Vivatech Paris this June, rather than at London Tech Week.
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