EU Quantum Tech Startups at Risk: Regulatory Hurdles and Funding Shortfalls Threaten Industry’s Future According to Multiverse CTO

The European Union’s (EU) quantum industry, projected to be worth $106 billion by 2040, is under threat due to regulatory hurdles and insufficient funding, according to the European Quantum Industry Consortium (QuIC). In 2022, EU startups were valued at under 30% of their US counterparts and received only 50% of the funding invested in American companies. This puts EU quantum companies at a disadvantage against competitors in the US, Canada, the UK, and China. The EU’s reluctance to take on lead investor roles forces startups to seek external investors, a challenge given the scarcity of private venture capital. Sam Mugel, CTO of Multiverse Computing, writes in Forbes.

Quantum technologies are strategic assets, and their value is recognised by EU institutions. The success of EU startups and scaleups developing these assets relies heavily on their access to capital. While the EU and its member states have established funding mechanisms to support local quantum companies, their implementation falls short of their objectives. This shortfall is causing the EU to lag behind other global players in the quantum technology sector.

In 2022, EU startups were valued at just under 30% of their U.S. counterparts, and funds deployed in EU startups amounted to just 50% of those invested in American companies. This disparity places EU quantum companies at a significant disadvantage compared to their global competitors in the U.S., Canada, the U.K. and China.

The Impact of Economic Downturn and Funding Challenges

The economic downturn has further exacerbated the situation, affecting the valuations of emerging tech companies. Venture capital funding for startups has plummeted by over half in the past year, putting EU quantum scaleups at risk. These scaleups hold invaluable patents on groundbreaking intellectual property yet struggle to secure the necessary funding to thrive.

Moreover, much of the intellectual property enabled by EU and member state research and development funding is either abandoned or sold to foreign competitors at discounted prices. This situation persists despite these EU companies being eligible for substantial EU funding.

The Reluctance of EU Institutions and the Need for External Investors

One of the main reasons behind this negative trend is the reluctance of EU institutions to take on lead investor roles. This reluctance forces EU startups to seek external lead investors for large financing rounds. Given the current scarcity of private venture capital, finding external lead investors becomes a significant challenge for scaleups.

The assumption underlying current regulations, where pre-approved EU funding for scaleups cannot be deployed without an external lead investor, is misguided. Large institutions such as the European Investment Bank (EIB) possess all the resources and knowledge required to validate EU scaleups when these have already passed the stringent validation processes of research and innovation programs like Horizon Europe.

Learning from Global Leaders

Other governments have taken decisive actions to support their scaleups directly. They have allowed their public institutional investors to act as lead investors or, at the very least, to participate in investment rounds led by existing private investors. This approach has helped propel non-EU scaleups forward and maintained their strategic positions in the quantum industry.

For instance, the Business Development Bank of Canada (BDC) has acted as a lead investor in nearly 42% of its investments. In the U.K., the National Security Strategic Investment Fund recently led investment rounds for two quantum startups, relying on the investment terms set by the companies’ legacy investors.

The Need for Change in the EU’s Quantum Industry

The EU’s commercial quantum industry’s position in the global race for quantum industrial leadership could face irreversible setbacks without significant changes. EU financial bodies, such as the European Innovation Council (EIC), should emulate the successful models of countries like Canada. With its technical due diligence and investment expertise, the EIC should set the financial terms of investment rounds in quantum technology startups.

Alternatively, legacy investors in EU startups must be allowed to set investment terms based on accepted valuation methods similar to those practiced in the U.K. and the U.S. In both scenarios, the EU’s financial engagement must align with Series B and Series C funding levels (around $80 million and above), which define the leading edge of the global startup scene.

The alternative to these two scenarios would be for startups and scaleups to find new, private funds to lead their investment rounds. However, Europe famously lacks the VC environment and risk appetite that exists in other geographies. This is particularly true for late-stage funding, putting European scaleups at a further disadvantage.

“Europe stands at a historic crossroads, with the opportunity to cement itself as a global leader in transformative quantum technology. In registering quantum technologies as critical for Europe’s strategic future, the EU has already recognized their importance moving forward. It is now imperative for the Union to acknowledge the significance of the impacts of financial conditions imposed on its startups and scaleups as well.” – Sam Mugel, Ph.D., CTO of Multiverse Computing

Quick Summary

The European Union’s position as a leader in the quantum industry is under threat due to regulatory hurdles and insufficient funding, putting its quantum startups at a significant disadvantage compared to global competitors. To maintain its strategic position, the EU needs to improve financial conditions for its startups and scaleups, potentially by emulating successful investment models from other countries or allowing legacy investors to set investment terms.

• The European Union (EU) is a key player in the quantum industry, which is projected to be worth $106 billion by 2040. However, its leadership position is under threat due to regulatory hurdles and financial challenges.
• The European Quantum Industry Consortium (QuIC) has highlighted that the growth and competitiveness of EU’s quantum startups are being hindered by the financial models required by European funding institutions.
• Quantum technologies are strategic assets with significant value. The success of EU startups developing these technologies relies heavily on their access to capital.
• In 2022, EU startups were valued at just under 30% of their U.S. counterparts, and funds deployed in EU startups amounted to just 50% of those invested in American companies.
• Venture capital funding for startups has dropped by over half in the past year, putting EU quantum scaleups at risk.
• EU institutions are reluctant to take on lead investor roles, forcing EU startups to seek external lead investors for large financing rounds.
• Other governments, such as Canada and the UK, have allowed their public institutional investors to act as lead investors or participate in investment rounds led by existing private investors.
• The European Innovation Council (EIC) should emulate the successful models of countries like Canada, or allow legacy investors in EU startups to set investment terms.
• If these changes are not made, EU startups and scaleups may need to find new, private funds to lead their investment rounds, or seek U.S. investments. Some startups, such as PsiQuantum and Cambridge Quantum Computing, have even moved to North America.
• The EU has the opportunity to cement itself as a global leader in transformative quantum technology, but must address the financial conditions imposed on its startups and scaleups.

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