Deep tech ascent: Europe's emerging digital industries - Financial Times

[ad_1]

Europe’s tech sector is regularly criticised for lacking ambition but growth in so-called “deep tech” start-ups operating in less glamorous segments of the industry has raised hopes for the future of the region’s digital hubs.

European industrial tech applications and technical platforms that underpin more consumer-focused services — from artificial intelligence, virtual and augmented reality to big data analytics and chip design — are attracting record levels of activity and investment, according to Atomico, the venture capital fund.

The region’s strong science base through its universities and research centres has in the past rarely fed into creating equally powerful technology groups able to match rivals in the US and Asia.

However, venture capital investors are now betting that the need to power more technically complicated consumer and industrial apps using the internet of things and data analytics means that Europe’s tech hubs can gain an advantage.

More than $2.3bn has been invested in the “deep tech” sector since the start of 2015, according to a study by Atomico, with executives in the industry pointing to the emergence of expertise in particular in robotics, chips and AI. These are feeding into other start-ups aiming to disrupt industries such as retail and finance.

This year, deep tech start-ups are on track to raise almost $1bn, which is four times the capital invested in 2011, with fund raisings in the past few months from companies such as France’s internet of things group Sigfox, Italy’s fintech start-up Euklid and Helsinki-based cloud computing company UpCloud.

“I like to use the word ‘renaissance’ because scientific invention, creativity and entrepreneurialism are all coming together in Europe right now,” says Mattias Ljungman, a partner at Atomico, which interviewed 1,500 European tech experts as part of its study.

“Take artificial intelligence — European companies are using it creatively for everything from fashion design and music creation to healthcare.”

US tech giants have also sought to tap into European expertise, either through investing in their own operations or acquiring and retaining businesses in the region.

For instance, Amazon’s voice-activated speaker assistant, Alexa, was partly built by its team of engineers in Cambridge, acquired through its purchase of Evi Technologies. Facebook’s Aquila drone initiative is being driven in Somerset, where it acquired Ascenta, and Google has built an engineering centre in Zurich.

Asian companies such as Huawei and SoftBank are also investing heavily in R&D in the region.

On Tuesday, Microsoft said that would invest $14m in an internet of things “incubator” based in Espoo, Finland, where Nokia’s headquarters are based.

“Historically the US has a deeper tech record, a deeper tech ecosystem and that’s why most of the big companies have come out of Silicon Valley,” says Kathryn Mayne, managing director of Horsley Bridge, a fund-of-funds that invests in US and European venture capital firms.

“What’s different since 2010 is that Europe has been able to generate some of these big outcomes. It feels like we’re entering a time when the power of things like artificial intelligence will really drive fundamental change faster than has been the case in the past.”

With much of the innovation being driven by research institutions, the talent pool is moving from Europe’s traditional tech hubs such as London and Berlin. Instead, start-up formation and, by consequence, funding is now flowing to locations tied to institutions.

“In the UK, that means Cambridge, but it also means places like Munich and Grenoble which are increasingly attracting huge investment,” said Tom Wehmeier, head of research at Atomico, whose two most recent investments are based in Malmo, Sweden, and Klagenfort, Austria.

“Zurich has definitely built a strong position in AI, VR and big data, on the academia and research side thanks to ETH Zurich,” says Georg Polzer, chief executive of Zurich-based data analytics start-up Teralytics.

“In the last few years this has started to translate into a number of new companies being started, mostly by alumni.”

Artificial intelligence in particular has been a powerful driver of growth. “Europe, and the UK in particular, is arguably the best place in the world for AI given DeepMind is here and is clearly the world leader in the area. Plus, Apple, Amazon, Microsoft, Twitter have all acquired UK AI businesses,” says Saul Klein, founder and seed-stage investor at London-based Localglobe.

Cities such as Berlin, Zurich and Paris are also noted for AI research. Asian internet giant Rakuten and Facebook both have AI labs in the French capital, working on topics such as image recognition and natural language processing to build into their products.

Atomico’s analysis of LinkedIn data found cities such as The Hague, Antwerp, Birmingham and Copenhagen in the top 10 for having “frontier hardware” skills, including expertise in robotics and drones. Lisbon and Milan were found to be hubs of talent in virtual and augmented reality.

“One indicator [of European tech strength] is that US investors are increasingly coming over here. 158 unique funds invested in Europe this year, not just the top-tier guys. The other is the entry of foreign giants — both in Asia and the US,” Mr Wehmeier says.

This year has also seen a record level of M&A activity in deep tech, much of it led by overseas firms looking to acquire European specialists, with more than $88bn of deals including chip companies Arm Holdings and NXP for $32bn and $47bn respectively. Even discounting these two large acquisitions, transactions crossed $9bn in 2016, almost tripling since 2014.

In the past five years, Apple, Amazon, Google, Facebook and Microsoft have acquired 53 European companies. Of these, 30 are from the deep tech category and seven were bought in 2016.

But the level of inbound M&A also underscores worries that Europe has yet to produce its own global tech success story.

Doubts still persist about the level of funding available to entrepreneurs in Europe compared with the US, in a period of economic and political uncertainty in the region. Some of the more promising European start-ups are still eclipsed by well-funded US rivals.

But one welcome sign at least is that global tech groups seem to be more willing to keep the bulk of their acquired businesses in the region, which again has helped foster a wider ecosystem for technology.

“In the past, it would have been fair to say that these companies were swallowed up by their acquirers and all but disappeared, but the trend we see now is the giants are building around them as strategic centres for engineering, product design and service creation,” Mr Wehmeier says.

[ad_2]