Written by Oliver Warren, Associate at DAI Magister
Investment in European deep tech has mirrored the broader decline in the technology sector; it has halved since the peak of 2021’s boom, reflecting investor preferences for ventures with lower capital expenditures and associated risks. Start-ups within the following verticals: Health and Bio, Transportation, Energy, and SaaS and AI experienced the most significant drops.
However, Dealroom data shows stark differences in funding for deep tech start-ups at the early, breakout (Series B & C), and late stages. After experiencing a modest deceleration between 2021 and 2022, early-stage deep-tech fundraisings have been surprisingly healthy, bucking the market trend, due in part to the hype surrounding Generative-AI and in Q1 2023 they received the highest infusion of capital for over a year.
However, this positive trend conceals a sharp decline in B and C round fundraises, which have seen investment activity plummet to $1 billion in Q1 2023 from a peak of $3 billion in Q1 2022. Late-stage rounds (>$100M) have also experienced massive declines, falling almost 70% from $2 billion in Q1 2022 to $634 million in Q1 2023.
$20bn+ worth of deep tech M&A in the next 15 months alone
While venture capital continues to show interest in the sector, the retreat of growth investors and the genuine prospect of a prolonged down cycle ahead has left growth-stage deep tech companies needing to implement stringent cost-cutting strategies to curtail expenses and extend their runways. But even those fortunate enough to have secured inflated funding rounds during the exuberant market conditions of 2021 will soon need additional investment.
Deep tech companies typically have high burn rates due to their heavy focus on research and development, requiring funding approximately every two years on average. With dwindling access to VC cheques, a non-existent IPO market, and practical limits to self-sufficiency, M&A is already emerging as a valid route to realising substantial profits for investors and founders, even if it doesn’t deliver the lofty $1bn+ valuations seen in 2021.
We’re already seeing more companies take this route. European deep tech M&A activity has rebounded to levels not seen for years and across our focus verticals, spanning Advanced Materials, Space, AI & ML, Cybersecurity, and Robotics, European M&A transactions have already rebounded to surpass 2020 levels (183 this year, annualised versus 176 in 2020), with some notable exits such as InstaDeep’s sale to BioNTech and SLM Solutions metal 3D printing business being acquired by Nikon.
In 2024, we forecast 250+ M&A deals in European deep tech, with at least 20 above $100m, making it the strongest M&A year since 2016. A key driver of this resurgence is the substantial increase in established deep tech companies across Europe, with many more companies fielding 100+ employees and sizeable, valuable engineering teams. The funding-driven growth in the size of European deep tech companies now makes many more sizeable, more strategic targets for international acquirers.
Overall, we anticipate the remainder of 2023 and 2024 will be banner years for European deep tech M&A, with potential deal value reaching $20 billion or more in the next 15 months alone.
