Sifted - How governments can help startups

Good morning there,

We’ve been writing a lot about exits lately in this newsletter — from Onfido’s impending sale to Pennylane’s plans to hoover up a bunch of its competitors — but now we want to hear from you. 

There are plenty of founders and employees who aren’t so lucky — plenty of startups forced to take funding on less than ideal terms — who then find themselves making almost nothing on exit, despite years of work and personal sacrifice.

If you’re one of those founders (or early employees), we’d like to hear from you. Were you just unlucky? Did you make some unwise decisions? What should other founders learn from you? Email me. 

Elsewhere today, we dig deep into what startups may need more than just government funding, an OpenAI alum’s fresh Series A round for his startup and Spain’s boost in early-stage funding.

— Amy Lewin, editor

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Learn how seamless money movement drives empowerment for freelancers and gig workers despite economic uncertainty. We deep dive into how freelancers now have access to more flexible wage payment methods, ranging from real-time rails to card-based disbursements. 

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

💰 OpenAI alum Jonas Schneider has raised a $21m Series A for his startup, Daedalus, which is in the throes of building its first autonomous factory in Karlsruhe, Germany. Daedalus produces precision parts for everything from medical devices and roller coaster wheels to rocket engines. 

• It’s trying to solve the problem high-end manufacturing companies like Siemens run into when trying to produce bespoke parts. Typically, companies outsource them to small factories that struggle to keep up with demand, stalling the overall manufacturing process. Daedalus thinks its automated factories can speed things up. 
• Daedalus already has 100 customers in the semiconductor, defence, energy and medical sectors, and plans to build other factories in Germany in the future. 
• “You couldn’t build this kind of company in Silicon Valley,” says Schneider, who now neighbours engineering giants like Bosch and Mercedes-Benz instead of software giants. “We want to take the best of the Silicon Valley mindset and combine it with the German manufacturing ingenuity.”

🌱 HSBC and Google have partnered to channel $1bn into 30 climate tech companies.

🏫 Is university innovation failing to boost economic growth? Seems so. 

• In the US during the 1950s, big companies spent four times as much on research as universities, according to this excellent read from The Economist. 
• “Giant corporate labs emerged in part because of tough anti-monopoly laws. These often made it difficult for a firm to acquire another firm’s inventions by buying them. So businesses had little choice but to develop ideas themselves.” 
• Nowadays, innovation is expected to come from universities — and it does — but corporates don’t seem to be paying much attention. 
• What’s the solution? Email us your thoughts. 

🤖 What governments could learn from startups on AI.

🎨 How can you create the dream workspace for Gen Z? Top takeaways from a recent Sifted Talks.

Early-stage startups in Spain streak ahead in a painful year. 2023 was a terrible year for investment almost everywhere across Europe — apart from Spain. 

• Early-stage VC investment actually increased 4% compared with 2022, according to Dealroom data. 
• The Spanish startup ecosystem raised a record-breaking $1.1bn across more than 800 funding rounds. 
• However, megarounds of $100m+ were non-existent, meaning VC investment across all stages fell by 42%.

Stockholm-based Xensam, which helps businesses optimise their software usage and manage their apps, raised $40m in funding from Expedition Growth Capital.

Delft, Netherlands-based CarbonX, which is working on a cost-competitive and more sustainable alternative to graphite to be used in EV batteries, raised €10m in funding. Innovation Industries, InnovationQuarter and Borski Fund led the round. 

Woking, UK-based Lilli, which makes software to monitor the behaviour of vulnerable people within their homes, raised £8.2m in Series A funding. West Hill Capital led the round. 

London-based Tortus, which is developing AI assistants for clinicians, raised $4.2m in funding. Khosla Ventures led the round and was joined by investors including Entrepreneur First. 

Stockholm-based Mantle, which develops and sells skincare products, raised £2.4m in funding. Venrex led the round. 

Dusseldorf, Germany-based Kauz, which develops chatbots, raised €2.3m in funding. Companisto led the round. 

Vilnius-based Axiology, which is developing a blockchain-based infrastructure platform for tokenised securities trading, raised €2m in funding. Baltic Sandbox Ventures and Coinvest Capital led the round. 

Cambridge, UK-based Zetta Genomics, which is developing a genomics data platform, raised £1.8m in a seed round extension from We Venture Capital. 

If you’d like to submit a deal, get in touch. 

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