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Deep tech has become a hot topic in Europe, with hopes that the region can have an edge over the rest of the world for innovation rooted in fundamental research. One of the key arguments: European countries have great universities and talent. But how can academic talent translate into startups? Let’s dive in. — Anna
Universities, a deep tech cauldron
“From startups to universities, we join forces to make Europe a world leader in the new wave of deep tech innovation!” European commissioner Mariya Gabriel tweeted earlier this week after her talk at the Tech.eu Summit in Brussels. As I noticed while attending the event, she was far from the only one to mention this topic enthusiastically.
That deep tech raises high hopes in Europe wasn’t exactly a surprise. Alex and I already wrote about Europe’s deep tech boom and investor interest in it earlier this year. But the role that educational institutions are expected to play piqued my interest.
VCs weigh in on Europe’s future in the critical deep tech market
“There is no doubt that the future of innovation in Europe will emerge from its world-leading universities,” Riam Kanso wrote in a Tech.eu guest post ahead of the event. Kanso is the founder of Conception X, which I had coincidentally heard about for the first time earlier this month. The U.K.-based nonprofit aims to transform Ph.D. researchers into venture scientists.
“It’s a simple but well-proven recipe,” Kanso said. “You have a Ph.D. team working on cutting-edge research with key real-world applications. They know their innovation could help discover effective treatments for now-incurable diseases, power up carbon-negative cities or tackle the future of automation. Through a combination of entrepreneurship training, access to pro-bono legal advice, funding opportunities and expert connections, we help them figure out how to turn their research into a viable deep tech startup.”
It isn’t a new thing for universities to more or less willingly give birth to spinoffs or spinouts (we will use the terms interchangeably here.) MIT, for instance, is famous for counting many entrepreneurs among its alumni, and quite a few of these ventures are based on intellectual property developed during their studies or research.
But in Europe, intellectual property can be a thorny issue. The “potential for meaningful innovation brewing across Europe’s research labs,” Kanso said, “largely remains untapped due to varying — and at times stifling — IP ownership rules that can make spinout companies uninvestable and hard to scale.”
Increasingly though, both European universities and venture capital firms are making efforts to make sure the most promising seeds turn into successful companies.
Mind the gap
Despite the hurdles, VCs looking for innovation know that spinouts are very much worth their attention. “As an investor in early-stage businesses, many with a deeply technical nature, we see universities as foundational to the companies we invest in,” said Simon King, himself a VC with a Ph.D.
King is a partner at Octopus Ventures and had a great conversation on deep tech and universities with TechCrunch’s Natasha Lomas in 2019 (It is impossible to sum it up here, so go read it if you are curious.) At the time, the U.K.-based VC firm had just published its first report on spinouts, including a ranking of British universities based on their entrepreneurial impact — which it refreshed in 2020.
A chat about UK deep tech and spin-out success with Octopus Ventures
The results of Octopus’ rankings are quite interesting, because they don’t necessarily match public perceptions — or to be honest, my own misconceptions. For instance, I didn’t expect Queen’s University Belfast to top the list two years in a row, or the universities of Dundee and Leeds to be in the top 10 twice.
“If you just asked someone on the street to name the top 10 universities in terms of commercializing the research that they do, [Dundee and Leeds] may not come up there. But they have fantastic technology transfer offices, they have really forward-thinking policies,” King told TechCrunch.
The goal of Octopus’ report, the firm explained, was to “identify which institutions create investor-ready spinouts and to share the reasons why they are successful for the benefit of all.” Based on its findings, it shared recommendations such as focusing on early customer discovery, aligning incentives and leveraging alumni networks.
When done right, university spinouts are investor ready, and potentially attractive to venture capitalists. For example, SLAMcore is a robotics startup and Imperial College spinout that recently raised a $16 million Series A round from Octopus and others, including Amadeus Capital Partners, whose partner Manjari Chandran-Ramesh shared interesting comments with me.
Chandran-Ramesh joined Amadeus in 2021 to focus on investments in the areas of machine learning, AI, robotics and quantum technologies. University IP and deep tech are her world, so when asked about hurdles for spinouts, she mentioned a lesser known issue:
“A big hurdle that university spinouts face more often than other startups are team dynamics,” Chandran-Ramesh said. While VCs like to back teams that have previously worked together, “what often happens with university spinouts is that they are founded exclusively by technical leads who subsequently go on to recruit commercial talent. It can take time for the team to gel as a unit and that can make a wide range of things much more difficult.”
If you are looking for proof that technical and commercial talent can struggle to build trust, former MongoDB CEO Max Schireson shared a telling story. In a guest post on TC+, he recalled that when he was interviewing to come aboard the company as president, one of the first things that founder and CTO Eliot Horowitz asked him was this: “Are you gonna hire a bunch of useless salespeople like they have at Oracle?”
For better or for worse: Managing founder-CEO tension inside a startup
And yet, it is only when they bridge the gap between theory and practice that spinouts can succeed.
“Successful university spinouts,” Chandran-Ramesh told TechCrunch, “have a clear sense of what customer issue they are solving with their product, not just what sets them apart technically. It is easy to get caught up in technicalities within a university setting, but what both customers and investors are interested in is what value proposition a technical differentiation specifically enables in the product within a specific industry.”
Europe’s cards
From IP and talent to commercialization, many of the obstacles facing university spinouts are the same all around the world. If Europe aims for a significant level of deep tech leadership, it will have to capitalize on its advantages and address some blockers.
On some fronts, Europe still has some catching up to do. For example, Air Street Capital partner Nathan Benaich has been advocating for better terms for spinout founders and more transparency.
Europe as a region has a leg up on other aspects, including a roster of universities that are already breeding grounds for spinouts-turned-startups. ETH Zurich, for instance, is known for its spinoffs, and VCs are paying attention.
It is not just traditional venture capital that is there for European spinouts, and it is good news for deep tech. Patient capital has become somewhat of a trend in the region, a good fit for a sector where companies need time to scale. Public funding is also available, which is often a relief when markets turn.
How public markets can help address venture capital’s limitations
“Innovation driven by research is at worst uncorrelated with the market environment and at best thrives in market downturns,” King said in 2020. He was referring to COVID, but his comment also applies to the current moment. And this countercyclical nature is one more reason to keep tracking tomorrow’s deep tech stars.
(Disclosure: The Tech.eu Summit paid for my flight and accommodation to attend the event as a panel moderator. I chose to refer to the event here on my own given the information value.)
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