Over the last decade, both in the US and in China, the venture capital (VC) model has struggled to generate significant innovation and successful companies compared to the previous decade. Recent analysis by among others the FT have argued that the VC model in both the US and China is dying, or at least seriously diminishing as a funding source for innovation, with a shift in focus from innovative startups to more traditional investments in for example stable production techniques in manufacturing.  

Since many EU-funded innovation projects in ERA framework have pushed for VC-like innovation programs towards end of Research-and Innovation Actions, we should ask ourselves what this declining trend in the European innovation landscape means for the EU?  

A Shifting Landscape 

To provide some numbers, in the US, only 20% of VC-funded startups in recent years have been successful, compared to 80% in the preceding decade. In China, the FT article shows that large collapse of startup and VC capital being invested in novel technology areas. When looking at the topics of AI, Data and Robotics, major investment firms predict an economic “winter” for AI and digital technologies, redirecting funds towards tangible resources like raw and advanced materials. This shift suggests a step down Maslow’s hierarchy, emphasizing fundamental needs over technological advancements. By way of example, high-profile investors like Bill Gates have shifted their focus to tangible assets. Gates, now the largest private farmland owner in the US, exemplifies the move towards investing in fundamental resources rather than speculative technology ventures. This trend indicates a recognition of the long-term value in essential resources over ephemeral tech trends. The reasons for this are plenty: from increasing geo–political instability due to wars, pandemics and climate crises- related extreme weather events to an increasing awareness of the risky strategy of centralising a massive part of the innovation funds into specific technological promises, such as Generative AI, controlled by merely a handful of US-based big tech companies that for now fail to show any return of investments on this technology.  

Perhaps we are also witnessing a ‘reality check’ of the role of technological innovation on daily life and the non-neutrality of these technologies and their resources, with protectionism back on the policy agenda, enforced via novel regulations that affect the globality of novel technologies (such as the Inflation Reduction Act in the US, The Green Deal in the EU and increasing control on foreign investments in China, to name a few). It can be asked whether the VC-model is still a fitting one in current circumstances in which resilience and long-termism seem to have become more important than quick turnovers and ROIs. 

The European Perspective

Over recent, several instruments have been tried under HEU, DEP, and other funding mechanisms, one being the cascading funding scheme, where a project consortium working on a technology act as indirect – yet publicly funded – VCs to set up calls and attract startups and SMEs to respond. The idea behind this instrument is to both speed up the time to market and to enlarge the scope of such projects by extending it directly to companies. Another instrument has been the lump-sum, getting rid of intermediate assessments of a project’s progress to unluck funding. Moreover, the landscape has extended to European Digital Innovation Hubs as places where outcomes of EU funded projects can be taken up and pushed further to market, including tested business models and revenue streams, thereby also heavily leaning on startup methods –and jargon such as the (in)famous business model canvas.  

Whether the success of this set of innovation instruments is effective has yet to be seen. However, ‘leaving’ the EC ERA landscape and adopting a wider lens, and looking at the political landscape, it seems both public-and private funding in innovation is regressing, with investments on both ‘sides’ focusing on defense technologies and resources security, taking that budget from other innovation areas. Whether on the short run this is justified and whether on the long run such investments ‘trickly down’ into civilian applications or lead to novel innovation pathways, is a matter of different perspectives on the role of innovation. This also depends on your own perspective as a reader on whether it is possible to truly design and develop technologies along a set of shared values, or to build values into technologies at all. Leaving that discussion for now, the point is that the EC innovation agenda heralds a value-driven approach (such as trustworthy and fair AI), while also wanting to attract (external) VC capital. One dilemma that presents itself is that such external VCs might not share similar values, or they might see potential markets for EU –developed technologies in parts of the world where enforcing values in technologies through laws and oversight is technology is not so obvious. What is the price if innovation vis a vis upholding our values? This presents yet another argument to question the VC model as it is. 

The topic of how to innovation is not only a matter of money; it is also matter of organisation and distribution. The question of European AI is a case in point. Particularly within ADRA (AI, Data, and Robotics), there have been strong debates on the logic of adopting a US-style investment culture-and model of AI, some arguing for a network of centres in AI and decentralised and local innovation, others arguing for a CERN for AI, thereby centralising public-and private investments, and presenting one clear and long-term strategy for AI made in Europe via missions and moonshots. Both models are fundamentally different from a VC model where in the market or potential applications in the future decide the innovation pathways of a technology, by demanding long-term commitments from both large industries and public sectors, thereby also changing expectations connected to funding of technological innovations. 

Impact of the R3GROUP project

R3GROUP, funded by the European Union’s Horizon Europe programme, aims to enhance the resilience of European manufacturing by enabling rapid reconfigurability. This project focuses on developing digital tools and strategies to support reconfiguration in various manufacturing sectors, such as automotive, fabricated metal products, and home appliances.  

For R3GROUP and its partners, the current investment trends highlight the need for careful selection of innovation investment instruments. By focusing on projects that offer real economic potential and sustainability, R3GROUP aims to contribute to genuine economic growth and technological advancement. Identifying and nurturing lines of innovation that provide tangible value is challenging but essential. 

The shift from speculative tech investments to fundamental resources highlights the need for a more strategic approach to innovation funding, also in very practical terms for a project like R3group. We will report regularly on how we see credible pathways for project sustainability and how we will identify and foster the most successful digital solutions for reconfigurability tools to increase resilience. 

Sources

• https://www.vox.com/recode/22528659/bill-gates-largest-farmland-owner-cascade-investments 
• https://www.goldmansachs.com/intelligence/pages/gen-ai-too-much-spend-too-little-benefit.html 
• https://bigthink.com/guest-thinkers/bruce-sterlings-scenarios-for-the-future-favela-chic-and-gothic-hi-tech/
• https://arstechnica.com/gadgets/2024/07/alexa-had-no-profit-timeline-cost-amazon-25-billion-in-4-years/ 
• https://www.ft.com/content/1e9e7544-974c-4662-a901-d30c4ab56eb7  
• https://research-and-innovation.ec.europa.eu/strategy/strategy-2020-2024/our-digital-future/european-research-area_en  
• https://commission.europa.eu/strategy-and-policy/eu-budget/motion/focus/eu-budget-boosts-eus-defence-industry-and-european-security_en  
• https://claire-ai.org/cern-for-ai/
• Latour, B. (2007). Reassembling the social: An introduction to actor-network-theory. Oup Oxford.
• Friedman, B., Kahn, P. H., Borning, A., & Huldtgren, A. (2013). Value sensitive design and information systems. Early engagement and new technologies: Opening up the laboratory, 55-95.
• https://commission.europa.eu/strategy-and-policy/priorities-2019-2024/europe-fit-digital-age/excellence-and-trust-artificial-intelligence_en 
• https://eu-robotics.net/claire-and-eurobotics-unveil-ambitious-moonshot-for-european-ai-sovereignty-by-end-of-decade
• Brown, R. (2021). Mission-oriented or mission adrift? A critical examination of mission-oriented innovation policies. European Planning Studies, 29(4), 739-761.