Europe is stuck in a static industrial structure with few new companies rising up to disrupt existing industries or develop new growth engines. This is not because we lack ambition, ideas, or talent, but because we fail to translate innovation into commercialisation. Europe’s lack of industrial dynamism owes in large part to weaknesses along the innovation lifecycle. Public sector support for research and innovation is inefficient, and this limits the EU’s potential to reach scale in breakthrough technologies.
Don’t take those points from us, take them from Mario Draghi in his eponymous September 2024 report.
To ensure its global technological competitiveness and strategic autonomy, Europe needs to develop and profitably commercialise breakthrough technologies in key industries that will be at the centre of the economy in the future. This includes semiconductors, quantum computing, biotech and smart batteries. What these industries all have in common is that they tackle complex scientific questions, have long investment cycles, and high capital requirements. They are known as “deep tech”: companies that turn technological breakthroughs into scalable, value-generating businesses to solve societal problems (McKinsey, 2025).
Deep tech already represented approximately 44 percent of all tech investments in Europe in 2023, according to McKinsey.[1] Europe is also gaining global relevance in the deep tech space, as the below chart shows:[2]
Both the EU and its Member States have gone a long way in recognising the importance of deep tech in the face of growing geopolitical turbulence. Most Member States now screen investments into such industries under national foreign direct investment screening rules and the EU is poised to make such regimes mandatory. The European Commission (EC)’s Recommendation on outbound investments additionally shows that it is serious about preventing these sectors from leaving Europe. It is therefore clear that the Europe is serious about protecting deep tech from potentially unwanted outside influence.[3] Where it falls short however is in creating an ecosystem where such firms can grow into profitable industrial success stories.
Most deep tech start-ups will not generate any returns for a sustained period of time. They require multiple investment rounds, where investors are initially not looking at revenues but at whether the founders are able to develop their breakthrough technology as planned. Public sector support is important to many of these deep tech companies, not just in Europe but in the U.S. as well. The major role U.S.-funded programs such as the Defense Advanced Research Projects Agency (better known as DARPA) have played in many technological breakthroughs has been well-documented, including by Mariana Mazzucato. Public support, strong universities and a vibrant venture capital (VC) community are all key ingredients to a thriving deep tech sector.
However, as we explain in this blog post, the EU’s state aid general block exemption regulation (GBER) hinders rather than facilitating public support for Europe’s deep tech companies. And the new draft of the GBER does not improve the situation much, unless some key changes are made.
How the current GBER fails Europe’s deep tech sector
As is well known, the GBER allows EU Member States to grant certain types of state aid without needing prior approval from the EC. It pre-defines categories of aid (e.g. for SMEs, R&D, environmental protection, regional development) that are considered compatible with the internal market, as long as specific conditions are met.
However, Member States are not allowed to grant aid under the GBER to companies that meet the definition of “undertaking in difficulties” (UiD). Aid to UiDs should instead be assessed under the guidelines on State aid for rescuing and restructuring firms in difficulty, so that the GBER cannot be used to circumvent those specific guidelines.[4] The reason for this is, at the risk of oversimplifying, to prevent GBER-exempted state aid from propping up genuinely failing businesses and distorting competition.
This is a laudable goal, but it means that it is extremely important that the definition of UiD is well calibrated to avoid unnecessarily restricting aid to firms that can put it to good use. The current GBER falls short in that regard, particularly when it comes to deep tech. There are several ways in which a company can qualify as a UiD. The most important one for deep tech companies is that a company is considered to be “in difficulty” where its accumulated losses exceed half of their subscribed share capital, unless they are a small or medium-sized enterprise which is less than three years old.[5] In addition, where the company is not an SME, it will qualify as a UiD if, over the past two years (i) its debt-to-equity ratio has exceeded 7.5; and (ii) its EBITDA interest coverage ratio has been below 1.0.
Because deep tech companies often require years of up-front investment, they can generate sustained accounting losses before any meaningful revenue materialises, which can lead them to fall foul of “loss of more than half of share capital” criterion. In addition, because deep tech companies in some cases rely heavily on non-equity financing, including bank loans, convertible loans, customer financing and other (quasi-)debt instruments, their leverage ratios are often higher than other companies.
The rationale for the UiD rules (preventing state aid from propping up unviable companies) does not appear to be applicable to such deep tech companies which are genuinely innovative, VC-backed, and able to attract private financing. However, the result of the UiD rules is that these promising deep tech companies are incorrectly characterised as being “in difficulty”. Not only does this prevent them from accessing GBER-exempted subsidies, but it also makes attracting private financing difficult, as promising firms are forced to explain to external financiers that they are not eligible for certain Member State investment funds. In our experience, VC investors are often well aware of the subsidies on offer from public investment funds and they will expect companies they invest in to make use of them. If the founder’s response is that this is not possible due to the company being considered to be “in difficulty”, then this could have knock-on effects for further funding rounds.
Although these issues can be addressed in multiple ways, it is useful to summarise why the current GBER fails deep tech companies:
- They are classified as being “in difficulty”, when in fact they are not, as they are performing in line with their business plans and are clearly seen as viable investments to venture capitalists and banks;
- They are only given three years within which they can have losses that equal more than half of its subscribed share capital,[6] whereas their business plan foresees a substantially longer period within which this may be the case; and
- Their financing structures are not accounted for in the UiD test. The subscribed share capital test will be met when accumulated losses are deducted from reserves and the other items generally treated as part of a company’s own funds, resulting in a negative total that exceeds half of its subscribed share capital.[7] For the purposes of the GBER, convertible loans and other quasi-debt are not treated as part of a company’s own funds, meaning that they cannot help offset accumulated losses. Deep tech companies often rely on such instruments. Moreover, convertible loan carry risks that are similar to that of equity. This is because a convertible loan is typically unsecured and subordinated, meaning that if the company fails, the lender ranks behind senior creditors and may recover little or nothing, making them more akin to equity holders than traditional creditors.
Enter the new GBER
The question was therefore whether the EC would fix this issue when the GBER came up for renewal. The EC clearly recognises that this is an issue, as is clear from the Explanatory Memorandum accompanying the draft revised GBER. Unfortunately, the draft of the new GBER does not resolve the issue even if it does introduce some improvements.
Let’s first discuss what does not change. First, the draft GBER would not materially change the definition of an UiD, meaning that many successful deep tech firms would continue to mistakenly qualify as UiDs. Second, the treatment of convertible loans is unchanged, such that these continue to weigh on deep tech’s debt-to-equity ratio.
Where the new GBER does make a change is in introducing a narrow exception: Member States will now be able to grant research and development and innovation (“R&D&I”) aid to an UiD, provided that it (i) meets the definition of an “innovative enterprise”, and (ii) is less than 10 years old.[8] While innovative enterprise has not been defined, a Recommendation published by the EC in March 2026 suggests that it will include (i) firms which have spent above a certain proportion of their total operating costs or net sales on R&D in the last three years, and (ii) firms developing products or services which are new or substantially improved compared to the start of the art.[9]
This is a rather modest change, which still means that many deep tech firms will carry the stigmatic label of being “in difficulty” in spite of their success. Such firms would moreover remain ineligible for types of aid covered by the GBER other than R&D&I aid.
Why the 10-year window is too short
The EC stated in its press release that under the draft GBER “young, innovative firms” would no longer be barred from being able to access R&D&I aid.[10] But while deep tech firms are strong innovators, by the time they have proven that their technologies could lead to genuine breakthroughs they are often not “young” anymore.
As Dealroom.co’s chart,[11] above, shows, it is common for deep tech companies to have a significant lead-in time before their products are first brought to market, and it often takes even longer for these companies to reach the scale-up phase. This, however, is the moment when they often need public sector support the most. By imposing a 10-year cutoff for any form of directly granted aid, deep tech scale-ups miss out on public sector support at a stage when many of them need investment the most, namely when they are finally starting to invest in serious production facilities.
Why limiting the exception to RDI Aid is too restrictive
The restrictions in the draft GBER on block exempted non-R&D&I aid to deep tech firms qualifying as UiDs also undermines the EU’s strategic objectives. Once they are ready to commercialise, deep tech firms will often need to scale up their production facilities. R&D&I Aid cannot be used for that purpose, subject to a limited exception for developing production equipment which is not (similar to equipment) already in use.[12] To scale up however, deep tech firms often don’t need to research and develop new equipment but to expand equipment which is already in use.
R&D&I Aid thus cannot be relied upon to support deep tech firms once they hit the commercialisation stage. This creates an undesirable situation where UiDs qualifying as innovative enterprises may be able to use Member State funds to develop new technologies, only to have the companies developing these technologies move to other regions where aid is provided for commercialisation. This enables jurisdictions outside the EU to enjoy the spoils of the EU’s investments.
How to make the GBER work for Europe’s deep tech sector
Thankfully, the draft GBER is not the final version of the document, and the EC is welcoming feedback. Europe has a clear need for investment in critical industries, many of which have “deep tech” characteristics (think of semiconductors, AI, quantum computing, biotech and green tech). The EC should seize the moment to align with its own Competitiveness Compass, and “revive the investment cycle”.
Sectors such as advanced materials, quantum technologies, green tech, biotech and robotics are rightly a priority for the EC. As explained in this blog post, these sectors are likely to have an overrepresentation of companies with deep tech features, which against all logic are seen to be “in difficulty”. When Europe wants to see significant growth in these sectors, it is important that use can be made of subsidies that are granted to support such growth.
Our key recommendations to address these issues are:
- Extend the window within which innovative enterprises that qualify as an UiD can benefit from aid to 15 years, with extension to 20 years under certain strict conditions;
- Include all forms of aid within this exception; and
- Amend the UiD test by:
- Using simple check if the total equity and quasi-equity (including subordinated loans and convertible instruments) remain positive to determine whether an undertaking qualifies as a UiD; and
- Classifying quasi-equity instruments such as subordinated loans, convertible loans and loans from public financial institutions such as the European Investment Bank as quasi-equity for the UiD test. These instruments have a risk profile which closely resembles that of equity, and the UiD test should reflect this.
From inventing to industrialising
It is not accurate to say, as some do, that Europe regulates and America innovates. There are plenty of promising innovations that originate in Europe. Where we fall short is in executing good ideas through the entire investment cycle and successfully commercialising them. While state aid is not the answer to all questions in this area, it is an important piece of the puzzle, as even our American friends will admit.
A well-intentioned instrument like the GBER should make it easier, not harder, to grant aid that is compatible with the internal market. Unfortunately, it can become a regulatory hurdle when it imposes rules that do not reflect the economic realities of specific industries. Deep tech is a prime example of this. It is to be hoped that the EC takes the opportunity of this consultation to improve its draft and deliver for European start-ups and scale-ups.
Disclaimer: the authors assisted Tech Champions, an organisation of 10 CEO/Founders of leading Dutch scale ups that mirror the 10 key technologies of the National Technology Strategy (NTS) that are essential for the future Dutch economy, in making a submission to the EC’s GBER consultation. The views in this blog post are the authors’ own and cannot be attributed to Tech Champions.
[1] McKinsey & Company, “European deep tech: What investors and corporations need to know”, 17 December 2024, Available at: https://www.mckinsey.com/capabilities/tech-and-ai/our-insights/european-deep-tech-what-investors-and-corporations-need-to-know.
[2] Ibid.
[3] Commission Recommendation (EU) 2025/63 on reviewing outbound investments in technology areas critical for the economic security of the Union, C/2025/390 (link).
[4] Recital 4, GBER.
[5] Article 2(18)(a) GBER.
[6] Assuming that they do not exceed the balance sheet and headcount thresholds for SMEs before then.
[7] Article 2(18)(a) GBER.
[8] Article 1(5)g) draft GBER.
[9] See Commission Recommendation of 18 March 2026 on the definition of innovative enterprises, innovative startups and innovative scaleups, C(2026) 1800 final (link).
[10] EC Press Release, “Commission invites comments on draft new State aid General Block Exemption Regulation”, 25 February 2026, Available at: https://ec.europa.eu/commission/presscorner/detail/en/ip_26_453.
[11] Dealroom.co, “Deep Tech Guide: Europe”, Available at: https://dealroom.co/guides/deep-tech-europe
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