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I’ve spent the last week talking to deeptech folk about a question that’s been swirling around social media circles of late as air taxi company Lilium and Swedish gigafactory poster child Northvolt have been desperately hunting for capital: is it the responsibility of the government to support struggling companies? And if so, how much?
Opinion is divided into two camps on that but, from the conversations I’ve had, it’s clear Europe needs to step up if it wants to compete with the US and China.
“The support, the backing and the talent are immense in the US and we are close to our customers. We can’t afford to limit ourselves to focusing on Europe. We have to play to succeed and we would rather win in another country than fail in Sweden,” Anders Forslund, CEO and cofounder of Swedish electric plane manufacturer Heart Aerospace, which has recently moved its R&D centre to the US, tells me.
The draw of the US
Forslund says he is grateful for the Swedish innovation framework, which supports early innovation, but he sees issues for growth in Europe when companies are ready to scale up.
“The EU has a regulatory framework that is very complicated, process-driven, and bureaucratic,” he says.
Another deeptech company which has picked the US is Norwegian battery maker Freyr, which opened its gigafactory in the state of Georgia instead of Norway, because of the support it would get through the country’s Inflation Reduction Act (IRA) tax credits. Its CEO Tom Jensen told Reuters that production in the US will be three times as profitable as it would in Norway.
Lack of country support in the EU
Last month the European Commission published Mario Draghi’s report on “The future of European competitiveness”, he outlined that if Europe does not increase investment by a minimum of €750bn–800bn annually, it’ll fail to be “a leader in new technologies, a beacon of climate responsibility and an independent player on the world stage”.
Many founders, especially those wishing to grow in Europe, applauded the report, but in some cases are sceptical about whether it will lead to change.
“We are underfunded in Europe. Europe is in third place and starting to fall behind the US and China,” says Forslund.
In the EU, individual countries aren’t allowed to financially support specific companies without a clearance on the EU level. One example of this is Germany being granted permission to support Northvolt with a €902m funding package, to build a factory in Heide.
“Given the level of support in the US and China, it is a challenge in Europe when countries cannot support individual companies and industries,” one deeptech investor who works closely with EU institutions, tells me.
“There have been discussions at the EU level for at least a couple of years to give an EU investment vehicle the mandate to invest larger sums in strategically important industries or companies, however, no decision has been made so far.”
Some countries have been better than others at circumventing those rules, though, the deeptech investor adds — pointing to Germany and France.
“France stands out in Europe, and I believe they do so by being bolder in their interpretation of EU regulations — they have for example granted support for hybrid and electric aircraft,” Forslund says.
France has also offered to support Lilium with subsidies and support if it would move some of its production to the country.
When asking Forslund if it would be better if European countries could support companies individually without having to ask the EU for permission, he says “definitely”, but believes there’s still an issue that Europe is much more risk averse than the US.
“Europe focuses a lot on wanting guarantees that an initiative will succeed before investing in it. In reality, I think if all the initiatives turned out well, then we’re not taking enough risks,” Forslund says.
“It’s like a football team that wins all its matches all the time — then they’re probably playing in the wrong league.”
Christian Bauer, chief financial and commercial officer at the air taxi startup Volocopter, echoed Forslund’s view on stage at Sifted Summit earlier this month.
“Courage is the word. In Europe, or at least in Germany, we are too political to make those big bets,” he said.
Whereas the US has invested heavily in new technologies, often through large defence initiatives like DARPA and NSIC and via contracts with the Department of Defence in the US, Bauer said that Europe is different.
“In the US, our competitors are funded via military programmes. That’s how it always has been done in the past,” Bauer noted, adding that in China, huge investments are made in the EV space, both inside China and also in Europe.
Solutions
So, how can Europe compete with China and the US?
The process of getting state support should become more streamlined, thinks Forslund. “Concrete government support that is simple and follows clear rules. There must be predictability, with clarity even before the support has been paid out,” he tells me.
“Singapore has been very good at this, where you more or less match venture capital and state support.”
CEO and cofounder of Swedish freight tech unicorn Einride, Robert Falck, points out that Europe’s lack of a functioning capital market for technological and innovation scaling, compared to the USA and China, hinders the growth of technology-driven companies.
“In Europe, we don’t have the political agreement between nations to change the state-controlled capital market structure. Instead, we have been leaning on the large corporates to lead the innovation,” he says.
“That Europe is falling behind when it comes to scaling new technology is not scaleups’ fault — it’s a structural challenge which is very serious for Europe.”
Another disadvantage in Europe is that the state agencies rarely give out contracts to scaleups — one that has managed that is The Exploration Company, which won a contract with the European Space Agency (ESA). Einride has received large contracts too — but in the United Arab Emirates.
“This is such an important component. That a scaleup would get a major contract in one of the larger countries in Europe is unheard of — instead, the system is built on a dynamic relationship between large corporations, unions and the state.”
While Mario Draghi is talking the talk, are European countries and the EU walking the walk? What do you think? Get in touch.
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Read the orginal article: https://sifted.eu/articles/deeptech-startups-europe-government/
