Europe’s Deep-Tech Paradox

Europe does not suffer from a shortage of capital. What it lacks is the legal courage and analytical competence required to direct that capital toward the areas where it can create the greatest long-term value: SciTech startups. This gap shapes the entire continent’s innovation landscape, and Sweden is no exception. Even as Sweden is celebrated as Europe’s leading producer of unicorns per capita, that success sits uneasily alongside a structural weakness that continues to hold back the ventures most critical to Europe’s future competitiveness.

The urgency of this debate has sharpened in the wake of the Draghi report, which underscored Europe’s declining growth trajectory relative to the United States and the rapid advance of China. Competitiveness is now a strategic necessity in a world defined by geopolitical instability, climate transformation, and digital acceleration. At the same time, Sweden appears to be thriving. According to The State of the Swedish Tech Ecosystem 2025, Swedish startups raised €2.4 billion in 2024, and Sweden leads Europe in unicorns per capita. These figures signal vitality, resilience, and entrepreneurial strength.

Yet beneath this success lies a structural imbalance. Much of Sweden’s unicorn production has been concentrated in comparatively fast-scaling, B2C-oriented ventures. By contrast, SciTech startups, those grounded in advanced materials, semiconductors, life sciences, energy systems, and other research-intensive domains, face persistent friction in their earliest and most fragile stages. The paradox is striking. We celebrate innovation while systematically under-equipping the very category of ventures that could define Europe’s long-term comparative advantage. 

Importantly, this is not primarily a shortage-of-money problem. Europe is not starved of capital. In fact, research from McKinsey & Company shows that deep-tech funds have generated average net internal rates of return of 17%, compared with 10% for traditional tech funds. Deep tech tends to operate in less crowded markets, produces a higher share of patents, and often targets large, underpenetrated global industries. The returns are measurable. And yet, despite this performance data, many private investors hesitate at the earliest stages.

The hesitation stems from a conceptual confusion that I have encountered repeatedly over the decades. Investors conflate risk with uncertainty. Commercial risk, including market competition, pricing pressure, and customer adoption, is something most investors are trained to evaluate. Technological uncertainty, however, is of a different nature. It concerns whether a scientific hypothesis can be engineered into a scalable solution, whether a reactor design can be stabilized, or whether a novel material will behave as predicted outside the laboratory. Addressing uncertainty requires structured analysis and technical competence before capital is committed. Too often, however, investors respond with familiar refrains: “Come back when you have market entry,” or “Return when a trusted lead investor has validated you.” In practice, this means postponing responsibility rather than exercising judgment. 

This culture of deferral creates a dependency cycle. When no one is prepared to engage analytically at the outset, every investor waits for another to assume the lead. The result is a “wait-and-see” ecosystem in which promising ventures are slowed, diluted, or pushed toward premature foreign acquisition. The recent deep-tech funding landscape report from Industrifonden captures this dynamic in what it calls the “pitch paradox:” complex technologies are inherently difficult to communicate to generalist investors, making validation essential at every stage. Grants, academic publications, and early specialist investors become signals of credibility precisely because analytical competence is scarce in the broader capital market. The report rightly emphasizes the need for patient capital, but patience alone is insufficient if incentives are misaligned. 

To understand what is missing, it is instructive to revisit Silicon Valley’s formative decades. When Tom Perkins invested in Genentech, he did not reject the proposal because of technological uncertainty. Instead, he financed the analytical process required to reduce that uncertainty, hiring external specialists to test assumptions before converting that engagement into equity. Crucially, this approach was supported by legal and fiscal structures that rewarded early, long-term commitment. Capital gains frameworks differentiated between short-term trading and long-term technological investment, while stock options aligned scarce technical talent with entrepreneurial upside. The ecosystem empowered investors to act early rather than wait.

Europe has not built equivalent conditions. Our capital gains systems rarely distinguish between speculative transactions and decade-long commitments to SciTech ventures. Sweden once did. Historically, long holding periods were rewarded with dramatically lower capital gains taxation, at times even zero after five years. That logic acknowledged that patient capital is fundamentally different from short-term speculation. Today, that distinction has largely vanished, reducing incentives for precisely the kind of long-horizon engagement deep tech demands.

At the same time, we have increasingly relied on government venture vehicles and EU co-funded programs. While these initiatives play a role in infrastructure and early validation, they do not resolve the central issue. The problem is not the volume of capital but the competence embedded within it. SciTech ventures require investors capable of dissecting uncertainty, not merely spreading financial exposure across a portfolio.

My experience with Polar Light Technologies illustrates what becomes possible when this competence gap is addressed. Facing a hesitant domestic VC market in 2021, we assembled an informal acceleration team composed of engineers, analysts, and experienced angels. We conducted structured due diligence to separate controllable uncertainties from genuine downside risks, strengthened the strategic narrative, and recruited a CEO aligned with the company’s long-term trajectory. The initial financing round became oversubscribed despite prevailing caution, and over the following years, the company progressed toward market entry while expanding its team significantly. This progress occurred not because the system was optimized for SciTech, but because we compensated for its weaknesses.

Some argue that Europe simply needs more capital. I find that diagnosis incomplete. The data already show strong returns in deep tech and sustained investor interest in Swedish startups. What remains underdeveloped are the legal and fiscal mechanisms that encourage early, technically competent engagement. Europe’s historical commitment to harmonization, creating uniform regulatory conditions across member states, has often overlooked the importance of comparative advantage. Regions such as the Nordics, Germany, Switzerland, the Netherlands, and the United Kingdom possess deep engineering traditions, yet their legal frameworks frequently mirror those designed for rapid B2C scaling rather than long-cycle B2B SciTech ventures. This mismatch is strategically irrational.

If Europe is serious about industrial renewal, several reforms are essential. Capital gains taxation should once again differentiate by holding periods, rewarding long-term investment in early-stage ventures. Flexible corporate forms, similar to US-style LLCs or EU-level special purpose vehicles, should be introduced to accommodate the unique financing structures of SciTech companies. Milestone-based stock option schemes should incentivize not only employees but also scarce external specialists whose early contributions can determine technological viability. Above all, we must focus on building durable financing chains that accompany SciTech ventures from laboratory breakthrough to IPO, rather than repeatedly injecting public funds into structurally immature markets.

Europe’s geopolitical challenges, climate ambitions, and digital competitiveness all depend on SciTech innovation. Sweden’s unicorn record proves that entrepreneurial talent and global ambition are abundant. But talent without aligned incentives is squandered potential. If Europe wishes to lead rather than follow, we must modernize our frameworks accordingly and do so with urgency.

About the Author

Lennart Ohlsson is a Swedish economist and venture capital specialist with more than three decades of experience as a business angel and fund founder. He is the founder of the Stoaf Group and Sustainable Energy Angels and has focused extensively on SciTech startups.

Ohlsson has served as a senior business advisor to Polar Light Technologies, where he helped structure early analytical due diligence, leadership recruitment, and investor engagement during critical growth phases. A former research economist, he has authored more than 20 books, including three that exclusively discuss venture capital methods and startup financing. In his forthcoming VC book, he emphasizes the role of lead-investor practices in complex deep-tech ventures.