The Ecosystem: island life is no idyll for deep tech entrepreneurs

Life in the EU’s island nations can be challenging for researchers with entrepreneurial ambitions. Creating a deep tech start-up in Cyprus or Malta involves overcoming hurdles that are much lower or non-existent in mainland Europe. And yet there is very little specific help to build their ecosystems.

The physical barriers of being based on an island can make routine tasks such as travel, networking and ordering equipment that much harder than elsewhere. But where an island location hits start-ups hardest is funding.

“In Europe it’s always a challenge to connect with potential investors, but doubly so in Malta,” said André Xuereb, founder and chief executive of Merqury Cybersecurity, set up in 2022 to work at the intersection of cybersecurity and quantum communications. “There are some business angels, some private equity investors, but there is no venture capital in Malta to speak of,” Xuereb said.

The island mindset can also be rather risk-averse, according to Antti Heikkilä, co-founder and chief executive of Acceler8, a venture builder also based in Malta. “We have new intellectual property in genomics, and I’ve been talking about it to the ecosystem players on Malta. Everyone is very excited, but when the time comes to raise funds or ask for grants to support the start-up, things start to become difficult,” said Heikkilä

Acceler8 has a portfolio that stretches across Europe, but also aspires to have a local impact. “We are trying to build the ecosystem of investors in this domain and understand their limitations,” Heikkilä said. “At the same time, we’ve set the high goal of setting up our own deep tech fund.”

There can also be problems when talking to potential partners abroad. “When it comes to proving that we know what we are doing on a technical level, and targeting the right market, then it can be an uphill struggle convincing people we know what we are doing,” Xuereb said.

“If someone from an island nation goes to an investment event in London, it’s assumed that they can’t be as good as someone from Israel, for example,” Heikkilä said.

Evagoras Xydas, founder and chief executive of Irerobot in Cyprus, agrees. “When we talk with investors and potential business partners, I feel that they are far more sceptical than they would be for a company in central Europe or the US regarding our ability to expand and scale-up in this bounded environment,” he said. Over time, this attitude can get under your skin. “There are physical barriers, but these become bigger in our minds.”

Irerobot works on interfaces, wearables and other devices that enable sensory-enhanced experiences. Its lead project involves a vibrotactile interface that turns speech and sounds from the environment into vibrations that people with hearing difficulties can feel.

In a hardware-based business such as this, the physical barriers of an island location also have an impact, with imported equipment and materials commonly slow to arrive, adding at least a week or 10 days to schedules. “That doesn’t sound so serious, but it adds up to a general delay in getting anything done,” Xydas said.

It also limits the possibilities for exploiting expensive equipment, such as a 3D printer bought for inhouse prototyping. “We cannot use this as a side business to get additional revenue that can support our main projects, because the market in Cyprus is very small, and it is difficult to offer that service abroad,” Xydas said.

Island start-ups also face challenges when it comes to hiring. “When you want to move fast and find people you can depend on, that can be an issue,” said Kleanthis Neokleous, co-founder of Silversky3D, a 2014 spin-out from the Department of Psychology at the University of Cyprus. Building on work funded by the European Research Council and the Cypriot government, the company develop virtual and augmented reality applications in sectors such as architecture and interior design, education and training, human resources, heritage and the arts.

“We try to look outside Cyprus, but there are many obstacles,” Neokleous said. These include salary ranges and communication difficulties. “Of course, we use remote working, but it is not the same as having the connection of working together in the same office.”

The situation in Cyprus is particularly difficult because of a regulation that restricts how involved academics from public universities can become in start-ups. “Those limitations meant we could not be involved on a daily basis,” said Neokleous. “That’s not ideal for a company built on strong connections with the research labs, and which depends heavily on scientific research to support what it does.”

One consequence was that none of Silversky3D’s co-founders could take on the role of chief executive. A team member was able to step up, but the search for someone with this kind of complementary business expertise is a challenge in the relatively small island.

“From an engineering perspective we have really good and talented people, but we don’t have many people in Cyprus who have experience in commercialising innovative products on the international market,” said Xydas.

This throws founders back on their own resources. “You have to be quite talented yourself in order to build something heavily dependent on technology,” Heikkilä said. “You have to master programming, the business sector, marketing, you name it.”

Shaped by island life

These constraints have a distinct impact on the kind of start-ups that form on the islands, and the strategies they adopt.

Merqury is a case in point. Xuereb is head of the Department of Physics at the University of Malta, where he teaches quantum mechanics. Alongside this academic work he developed an interest in quantum communications, in particular through working with an unusual piece of infrastructure: a telecommunications link between Malta and Sicily. “It was just long enough to be interesting, but short enough to allow us to run our experiments without having to break the laws of the universe,” he said.

That research led to collaborations on quantum communications with colleagues in Italy and Austria, and involvement in the European Quantum Communications Infrastructure (EuroQCI) project. Meanwhile, quantum communications took off as an industry.

That opened up possibilities, if the funds had been there to take advantage of them. “With serious academic resources, my natural inclination would have been to build the best quantum lab we could build, do the fun stuff, and maybe occasionally contribute to the technological development,” Xuereb said. The main prize would be to develop the quantum communication device at the heart of a new system. “And that’s what many of my colleagues on the continent are engaged in.”

That was not an option in Malta, and so Xuereb looked elsewhere in the quantum communications value chain and asked what was missing: something within reach, given his resources, yet distant enough to be a market worth capturing. “It turned out that very few people were looking at the layer of technologies that sit between the quantum heart of the physical device and the end user,” Xuereb said.

This is where one of Malta’s limitations turned into an advantage. “In order to build that series of technologies, you don’t need a big physics lab, but you do need people with very good standard ICT skills,” Xuereb said. And this is exactly what Malta has, thanks to well-developed gaming and software ecosystem.

That opportunity comes with costs, notably the salary expectations in the gaming industry, but it proved enough of an opening for Xuereb to push ahead with Merqury. “It started out as a challenge, but it got us looking in a direction that few other people were considering, which could actually be quite a good thing,” he said.

Silversky3D has also evolved in a particular way because of the constraints. It covers its costs with research grants and income from services sold to industry, both at home and abroad, but this makes it a rather complicated pitch for venture capital investment.

So, rather than develop new products internally and scale-up, Silversky has developed a strategy of spinning out new companies to take forward new ideas, in partnership with others. “We see Silversky as an incubator that brings ideas to industry, and develops them in collaboration with experts in the corresponding fields,” Neokleous said.

One example is MentisVR, a company set up in 2020 to develop virtual reality sports training applications, beginning with a system for training goalkeepers. The chief executive is former professional goalkeeper Urko Pardo, and Neokleous is chief technology officer, a position he can take because he now works for a research institute with a more enlightened attitude to academic involvement with start-ups.

Another spinout is Immerseav, which has developed a virtual reality training system for the maritime industry, in partnership with Prevention at Sea, a company supplying maritime software and services. “For each of those we are trying to attract funding, either through venture capital or private investment,” Neokleous said.

Access to possibilities

While start-ups are turning the constraints of island ecosystems to their advantage, there is a call for more support. Neokleous would like to see greater acknowledgement of the challenges island start-ups face, and efforts made to address them. “A way needs to be found to give us access to possibilities for expansion that are available on the mainland,” he said. “And these need to be brought to the periphery, rather than having incentives to take everything and move to the mainland.”

Xydas would like to see the administrative burden of funding reduced, and more consultancy support for commercialisation and business development, based on expertise grounded in the international market. Help to join established accelerator programmes abroad that showcase a portfolio of successful start-ups would also be welcome, and support for network building. “There is some support for going to exhibitions where there are investors and potential business partners, but it is not enough,” he said.

Meanwhile, Xuereb would like to see EU grant funding better tuned to the way start-ups work. For example, delivering money in tranches can be hazardous for young companies. “There is a risk that you can become capital-negative and go bankrupt, just because the money you have been promised will not arrive in time to pay for the salaries,” he said. “That’s frustrating for people in my position, because you need to have money to ask for money. And when innovation very often lies with small companies, why penalise them?”

Similarly, he would like to see EU funding function a little more like risk capital. “Whenever there is money for R&D and innovation, it should be structured in such a way as to allow for the recipients to fail gracefully, and not just rely on the behemoths who can absorb the costs.”

Elsewhere in the Ecosystem…

• London-based investor Octopus Ventures has launched a business accelerator for deep tech start-ups in the UK and across Europe, with a focus on ideas contributing to global sustainability. Examples include quantum solutions, photonics and electronics, advanced materials, robotics, agritech, and artificial intelligence.
• A training programme for specialists in emotion artificial intelligence is to be run by the European Institute of Innovation and Technology (EIT) Digital community. The programme will be offered in person, online, and in hybrid formats, with the goal of training more than 1,000 participants over the next four years.
• The European Commission has set out plans for a common European data space in tourism, as a counterpart to data spaces in sectors including health and mobility. The aim is to allow public authorities and companies, including tech start-ups, to share a broad range of data that informs the development of tourism services.