The European Funding Paradox

A Note from PocketVC Founder, Dan 💡 Welcome to PocketVC. I'm Dan, and like many of you, I'm captivated by Deep Tech. I started this blog to celebrate the world-changing work of startups and to unpack the excellent research being published, always looking for the overlooked insights. This week, we are continuing our mini-series diving into the European Deep Tech ecosystem. Our insights are driven by the comprehensive data found in The 2025 European Deep Tech Report. Without the rigorous work of the report's creators Lakestar, Walden Catalyst, and dealroom.co this analysis would not be possible. Our goal is not just transcription. We take this high-level data and add a critical layer of commentary, interpreting what the trends truly signal for the future of Deep Tech investment. Introduction: The $15 Billion Question The European Deep Tech sector attracted a resilient $15.1bn in 2024. But who is funding the world-changing breakthroughs coming out of Oxford, Paris, and Munich? The answer reveals a critical vulnerability in Europe's technological sovereignty: as our best companies grow, the capital controlling their destiny is increasingly foreign. This post drawing exclusively from the 2025 European Deep Tech Report examines the sources of capital, the funding gaps, and the urgent need for domestic investors to step up and back the next generation of Deep Tech giants. I. The Late-Stage Funding Chasm: A Sovereignty Concern The most important structural dynamic in European Deep Tech funding is the dramatic shift in investor geography as companies scale. The data on fund source by stage illustrates a clear "investor loyalty funnel" that favors domestic capital early on but relies heavily on external partners later: A. The Investor Loyalty Funnel Domestic Dominance Early On: In Pre-Seed up to $1m and Seed $1m - $4m rounds, domestic (local country) investors provide 71% to 64% of the capital. The Scale-Up Shift: As rounds reach Series B and C, the domestic share drops sharply, indicating European funds are either reluctant or lack the dry powder to lead later, larger deals. The Mega Round Vulnerability: In Mega Rounds ($250m+), the domestic share plummets to a mere 23% At this stage, USA investors contribute 33% of the capital, with European funds (non-domestic) contributing a further 28% This means that over half of the money is coming from non-European investors at late stage. This is a double-edged sword: global interest validates the technology, but it cedes control and economic value to foreign capital when companies are poised for breakout growth. B. The Funding Stage Breakdown The shift in investor sourcing mirrors the funding bottleneck observed across stages: Late-Stage Contraction: Late-stage rounds $100m are down 50% from their 2021 peak, demonstrating the difficulty in filling these large growth checks domestically. Growth Stage Stability: The relative stability of Series B and C rounds suggests a healthy conversion of early-stage winners, but the capital still often originates from external sources to close these rounds. II. A Diverse and Growing Investor Ecosystem: Who is Funding Deep Tech? Despite the late-stage gap, the European investor base is deep and increasingly specialized, providing varied options for Deep Tech founders. A. The Dedicated European Funds: Expertise in Action Europe boasts a strong and diverse array of funds crucial for offering the patient capital and technical expertise required for long Deep Tech development cycles. At the Seed and Series A stage, firms like IQ Capital are actively backing founders in Protein Generative AI (e.g., DreamFold) and Quantum Networking (Nu Quantum). Similarly, Vsquared Ventures focuses on early Deep Tech bets in Future of Compute and Robotics, with recent investments in cognitive robotics (Neura Robotics) and next-gen energy solutions like battery recycling (Cylib). Moving to the Growth stage, VCs like Jolt Capital continue to push scale-up investments in areas like Nanotechnology (P2i), while the British Patient Capital directs funds toward pivotal UK scale-ups like the quantum error correction firm Riverlane. This specialized capital is essential for building the initial technical moats. B. Corporate and Dual-Use Investors: Strategic Capital The ecosystem is stabilized by the strategic activity of Corporate Venture Capital (CVC) arms and global dual-use investors. Their investment signals strong market validation and strategic alignment. Corporate giants are actively investing to secure their supply chains and future technologies: Bosch Ventures, for instance, is backing deep tech hardware like silicon-based quantum processors (Quantum Motion), and Siemens (Next47) is investing in chip monitoring innovators (proteanTecs) to secure industrial reliability. The rise of Dual-Use investment is also critical. Funds like Ultratech Capital Partners an early-stage dual-use VC are strategically backing companies that serve both commercial and security markets. Global funds like Wa'ed Ventures (Aramco) are actively localizing key technologies like AI cloud infrastructure (Ori). This mix of domain expertise and strategic capital is what enables European breakthroughs to survive and compete internationally. III. PocketVC's Opinion: The True Opportunity is Now, at Seed Stage The data confirms that Deep Tech is the engine of the European economy and offers compelling returns. Yet, the persistent reliance on foreign LPs and VCs to fund our scale-up champions is more than a financial gap it's a structural risk. However, focusing solely on the late-stage funding chasm overlooks the most vibrant opportunity right now: the early-stage ecosystem is a hotbed of world-changing IP, and this is where domestic VCs are actively planting the flags. The smartest domestic capital is already making high-conviction bets at the Seed and Series A stages, focusing on founders translating scientific breakthroughs into commercial companies. Early-stage investments by funds like Vsquared Ventures focus on categories such as Future of Compute (e.g., Lace Lithography), Energy (Cylib for battery recycling), and Robotics (Neura Robotics). Meanwhile, IQ Capital is backing companies in cutting-edge fields like Protein Generative AI (DreamFold) and Quantum Networking (Nu Quantum). We also see CVCs like Bosch Ventures directly investing in foundational research-backed companies like Quantum Motion (silicon-based quantum processors). These companies represent the breakthrough innovation that will define the next industrial era. The deficit we face is one of collective will and risk appetite in the late stage. To secure the next decade of European innovation, we must commit to backing these domestic champions all the way to a global IPO or a large domestic M&A event. The time for decisive domestic investment is now.