Do startups need money from governments — or something else?
Governments across Europe are increasingly investing, from ever larger pots of capital, in tech startups — particularly those they think are key for the “tech sovereignty” of the continent.
Last February, Germany launched its first big commitment to the cause: a $1bn deeptech and climate tech fund to invest in startups in areas such as AI, robotics and digital health. One year on, the fund has made six investments (mostly at the early stage), including in 3D-printing company Xolo, quantum computing startup Kipu Quantum and wastewater solution Membion.
This year, it plans to increase the number of investments it makes and write more big cheques to later-stage companies. The lack of growth financing in Europe has been a challenge for years — but is being more keenly felt now that growth investment from the US has dropped, down from a peak of 39% in 2021 to 25% in 2023, according to the latest State of European Tech report.
“We want to position ourselves where the gap is in the market, in later stage investments — especially for asset-heavy technologies and those that have a really large need for external financing,” says the fund’s managing director Elisabeth Schrey, in a Sifted interview published today. “Enabling large European rounds is the focus of this year.”
Other European governments are also announcing funds to pump money directly into fledgling deeptech companies. They hope to help them grow into national (and perhaps one day, global) champions — while ensuring they stay on European soil.
France’s state bank Bpifrance has been making direct investments in startups for over a decade, with funding amounts heading sharply up and to the right. Last year, it announced it would pump €500m into deeptech startups specifically, as part of its €54bn “France 2030” fund. Spain is also currently rolling out Fond-ICO Next Tech, a €4bn fund aimed at deeptech scaleups and “high impact” digital projects, which aims to mobilise up to €8bn from VCs.
Several European governments are also contributors to the €1bn Nato Innovation Fund (notably, not France), which will invest in everything from AI to quantum to biotech. Meanwhile, the UK’s former defence secretary Ben Wallace has called for an additional £1bn defence tech fund to be created to prevent European defence innovation from “disappear(ing) across the Atlantic”.
But not everyone is convinced that governments throwing money at startups is entirely a good thing.
"Startups don't need government funding, they need government customers,” says Uwe Horstmann, partner at Berlin-based VC Project A.
“The public sector has a huge lever through its purchasing power and the credibility that a government contract gives to a startup. That kind of credibility in turn attracts private sector investors like VCs,” says Horstmann.
“[We need] a change in mindset and a greater commitment from governments to actually use and implement the solutions that startups are offering. That way all parties benefit from technological advances: startups, governments and all of us as citizens.”
Finding funding, especially growth funding, is just one challenge for startups; complex regulation, immigration rules that make it difficult to attract international talent and poor digitalisation can also hold them back, says Zach Meyers, assistant director of Centre for European Reform, a London-based think tank.
“Countries that have managed to build a good startup culture, like in the Nordics and Baltics and, more recently, France, have focused on addressing many of these factors in a single, long-term strategy, rather than seeing it as only a question of money,” adds Meyers.
Digitalisation (or the lack thereof) is a huge topic in Germany — something that founders (and myself too) have bemoaned for years. Doing your taxes in German legalese, having to sign documents like employment contracts in wet ink (yes, seriously) — and waiting months for tax letters in the post are just some of the things one has to put up with living in Europe’s largest economy.
But moaning aside, I’d like to hear from you. Where do you think governments can most usefully intervene in startup ecosystems? And which European countries are doing the best job of it? Let me know.
— Miriam Partington, DACH correspondent
