Why Europe needs to invest more in Deeptech startups (especially AI)

The EU is lagging behind China and the US. It needs to work on talent retention and early-stage funding.

As written in my previous blog post ‘What is Deeptech?..and why should we pay close attention?’ …it’s one of the most challenging yet impactful and worthwhile areas that VCs can invest in.

A recent survey of 3,000 managers finds that 57% of their companies are piloting or deploying artificial intelligence. Also, 59% claim to have an artificial intelligence (AI) strategy and 70% that they understand how AI can generate business value. But where do these AI technologies come from? The answers, as many would have guessed, are China and the US.

Chinese companies have close to 110,000 AI patents, whilst the US boasts of having over 60,000. Europe, in contrast, has just a little over 5,000 patents. Such a lag has prompted the European Commission recently to launch the plan Shaping Europe’s Digital Future: Strategies for Data and AI, seeking to close the gap and to provide a potential future direction of AI development for the member states.

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A year ago, Margrethe Vestager was handed a simple mission that is fiendishly tricky to fulfil: make Europe fit for the digital age. The EU’s executive vice-president is now nearing delivery time. Over the next few months, the European Commission will unveil landmark legislation to help protect consumers and smaller companies from the overmighty US tech giants, combat disinformation and cyber crime, improve connectivity and unleash entrepreneurial innovation. This legislation may help determine whether Europe can catch up and even outpace the US and China in many fields, or limp along in the digital slow lane.

“Technology changes society at a very fundamental level”
- Margrethe Vestager

There are several factors holding Europe back. First up is talent. It is not just a matter of recruitment but also retention, with many European companies losing their most skilful AI talent to overseas competitors. Another reason is regulation, which poses a conundrum in the continent. Whilst some observers believe that it is critical for the field of AI to be properly regulated, others worry that heavy or strict regulations could seriously constrain developments.

One of the most important factors, however, is that Europe suffers from a lack of early-stage private capital. To fill the funding gaps, and there needs to be more focus from venture capitalists on funding early stage European AI start-ups….Otherwise there is a chance they will move to the US or just stop in their tracks. Indeed, despite the challenging climate due to Covid-19, the amount of AI investment in Europe is expected to increase further in 2021. Yet, private funding alone is insufficient. As Kim Jørgensen, the head of cabinet for the EU Digital Commission, argues, even though Europe has been able to form a strong base for AI development, more efforts for funding within the budget of the EU is vital to the continuous AI development across the continent.

Traditionally, Europe has been more focused on small and medium enterprises and manufacturing, so it’s time for the development of AI to tap into this established structure. One may find it surprising to learn that there is no shortage of AI innovators in Europe, many with compelling use cases. In my view, the most promising AI start-ups (funded within 10 years, and with less than $50m of funds raised) with the potential to drive economic growth in Europe can be placed into five categories:

Robotics. Europe’s advanced manufacturing lead can be extended using AI to assist with design, construction, and maintenance of robots and other intelligent machines. Promising innovators: Blue Ocean Robotics, Twenty Billion Neurons, Another Brain, Nomagic, Furhat Robotics.

Business intelligence and analytics. AI technology makes it possible to collate vast amounts of information and derive insights from where it would otherwise be impossible. Promising innovators: Adverity, Kayrros, Synerise, Foxintelligence, Crystal.

Fintech. While identity checks and everyday banking have been obvious beneficiaries of AI, it has also been widely adapted for the purpose of customer communications and complex services, such as risk analysis, investing, and insurance claim assessments. Promising innovators: Yapily, DreamQuark, Coya, Candis, Quantumrock. (Also worth looking at French fintech Lydia)

Healthcare. AI in this field involves sophisticated algorithms and software, which are able to outperform human experts in the analysis and interpretation of medical and healthcare data. Promising innovators: Aignostics, CardioLogs, Kitman Labs, StethoMe, MMG.

Transportation/navigation. AI is also driving innovation in the transportation and navigation industry, playing a major role in directing autonomous vehicles, whilst also disrupting research and supply chain processes. Promising innovators: Sensible4, Gideon Brothers, HUUB, Kleos Space, INTRANAV.

Collective efforts are required

The current developments in AI are only the beginning. Despite the initial success, it can only be sustained if all parties work together. Regulators must create a supportive environment and provide the necessary funding (in spite of the massive government spending on the economies due to COVID-19). We will also have to find new ways to increase the talent supply. Just as important is making more risk capital, raised from both private and public sources, available. Europe failed to board the internet boat two decades ago, missing the opportunity to create world beating e-commerce champions. It simply cannot afford to miss the AI boat this time.

Thanks for reading!

LSE MSc Finance student. Interested in pioneering technologies, the VC industry. Snippets of my thoughts, along with interviews with industry leaders.

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Aalia Shah

Aalia Shah

LSE MSc Finance student. Interested in pioneering technologies, the VC industry. Snippets of my thoughts, along with interviews with industry leaders.

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