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Nov 11, 2022

Nov 2022 | Sector insight: European deeptech, the next wave

Acquirers and investors have been circling Europe’s vibrant deeptech sector for several years now. Yet as the economic picture clouds, how is this affecting appetite for dealmaking in this area?

Software and SaaS deals may have dominated the headlines for a decade or so, but over the past three to four years, another corner of the technology space – deeptech – has been garnering increasing amounts of attention from strategic acquirers and financial investors. Silverpeak analysis shows, for example, that venture capital (VC) funds have raised an estimated €4bn of capital for investment in European deeptech since 2021.

Encompassing areas such as fundamental artificial intelligence, semiconductors, spacetech, medtech, IoT and additive manufacturing, deeptech aims to solve complex scientific and engineering problems. Companies in the sector benefit from defensible IP and their value creation potential for shareholders is significant, but their growth path and time to market is longer than for many other types of technology business, such as those in software or e-commerce. The complexity of the technologies and the problems they address naturally means that R&D time horizons are more extensive and incubation is more capital-intensive. These companies also therefore need investors and advisors with specialist knowledge.

For those with the expertise and patience required to exploit deeptech’s potential, companies in the sector offer attractive investment and acquisition opportunities. As a result, we continue to see strong European deeptech deal volumes, even as the economic outlook has become more challenging.

Strategic interest

Our analysis shows that, while large deals are notably absent in 2022, European deeptech M&A activity in the sub-$1bn deal value range this year has remained largely consistent with historical levels. The third quarter saw deals in this bracket worth an aggregate $1.89bn, which suggests a run rate for H2 of $3.65bn. This is on a par with the value recorded in H2 2021 ($3.64bn), which was a time of exceptionally strong dealmaking in the technology sector more generally.

Total M&A Amounts and Deal Count, 2018 - H2 2022

This demonstrates that there is clear appetite among strategic acquirers for European deeptech companies at the middle and lower end of the deal size spectrum. Buyers may consider these smaller deals as less risky, given the risk of recession. They may also see segments of the deeptech sector as an answer to some of the issues businesses face today – automation and robotics could relieve pressures stemming from labour shortages and rising wages, for example. Further, for US buyers in particular, European deeptech targets offer access to skilled workers that tend to have higher retention rates and lower average salaries than their peers in the US.

Enter the venture funds

However, VC investment is where we see the biggest shift in the deeptech deals market today. There is now a deep pool of investors targeting this space in Europe – our analysis shows that 236 investors participated in deeptech A, B and C rounds in the first nine months of 2022, with nine of these participating in at least three rounds in the sector.

Series A, B & C Total Financing Amounts and Deal Count, 2018 - H2 2022

Our data suggests that these investors have altered their investment approach against the backdrop of a challenging economic environment in many markets. In 2021 – a more bullish period than the one we are experiencing today – Series C rounds in European deeptech companies totalled $1.47bn, with a median deal size of $44m. However, for the first nine months of 2022, Series C activity slowed to just €369m, with median deal size falling to $20m.

VC investors are instead doubling down on earlier-stage opportunities. The year so far has been particularly strong for Series A rounds in European deeptech companies: at $795m, the first six months of 2022 saw the highest value – by some margin – of half-yearly Series A rounds to date, and H2 looks set to be equally robust, with $360m in Q3 alone. This compares with a full-year total of $538m in 2019 and $970m in 2021. Further, the median A-round deal size has risen substantially this year: in 2019 and 2020, this was $9m and in 2021, $11m; yet the median for the first nine months of 2022 stood at $14m.

So why are we seeing this pattern emerge among VC investments? One potential explanation is that larger companies are cutting costs at a time of more difficult economic conditions in a bid to preserve the capital they have raised to date. This will naturally reduce the size of the rounds they are looking to raise. At the same time, VCs are more cautious about investing large sums in more mature companies for the simple rationale that the path to exit may be more challenging in the near-term.

Yet on a more upbeat note, the other reason for more early-stage rounds is that VCs are playing a longer game: they are financing and supporting a bedrock of emerging deeptech companies that will continue to develop through a likely recession. Under this scenario, these businesses would reasonably be expected to start generating revenues as the economic cycle turns to a more positive outlook.

Deeptech innovations fostered today will bring about a new period of profound technological transformation in a variety of fields that could, among other things, accelerate medical breakthroughs, help stem climate change or solve supply chain problems in a de-globalising world. Our analysis demonstrates that there is a strong appetite among VC firms for investment in these early-stage opportunities today and that this will help to build the foundations for future transformation.

Silverpeak is a mid-market technology specialist representing European growth businesses in M&A and financing transactions. Our experience of working with European deeptech businesses includes investment rounds and acquisitions by leading international strategic buyers, institutional investors and VC firms. Our eight most recent deeptech deals had an aggregate enterprise value north of $700m and a cumulative transaction value of over $300m.