Why Lithuania could be set to be Europe’s next deeptech hotspot
With growing VC interest, resilient economic growth and a unicorn boom, Lithuania is one of the leading innovation hubs in central and eastern Europe (CEE). While average funding per startup is decreasing globally, it’s increasing in CEE, with Lithuania growing the fastest since 2017 in enterprise value.
The country is particularly seeing a growth in deeptech startups, supported by its life sciences innovation and favourable tax and legal regime.
But are these the only factors driving the deeptech boom in Lithuania — and what can we expect to see from the sector? Sifted asked the experts.
Strength in STEM
Data from Innovation Agency Lithuania shows that Lithuania came in second in the EU with a quarter of students choosing STEM academic disciplines (out of the 56% of the population with higher education). Lithuania also ranks second among OECD countries with 49% of women in science.
“We have very strong universities in life sciences, in particular. And the fact that technologies, like CRISPR, were developed here and that institutional know-how is super useful — it helps in the growth of the deeptech sector,” says Juozas Nainys, CEO at Droplet Genomics, a Vilnius-based deeptech focusing on droplet microfluidics for R&D.
“Over the past five years or so, there’s also been a focus on driving entrepreneurship within the STEM community and new programmes that are driving entrepreneurship have been established — when I was studying, around 10-15 years ago, there were no such courses,” he adds.
The generous public funding opportunities are also a driver for deeptech in Lithuania, says Roberta Rudokienė, head of Startup Lithuania. Startup Lithuania is the country’s national startup ecosystem facilitator which helps Lithuanian startups at all stages of their development — from idea implementation to their international promotion. It’s backed by Innovation Agency Lithuania, the official public agency responsible for the promotion of innovation in the country.
“A lot of support schemes are under way, specifically for deeptech startups — there are grants for startups developing AI and blockchain, and other new acceleration funds have just started operated, one of those — Baltic Sandbox Ventures — will focus specifically on deeptech and life science startups,” says Rudokienė.
Baltic Sandbox Ventures raised €10m for its first deeptech fund in 2022, becoming the first VC in the Baltic region focusing solely on early-stage deeptech and life science solutions.
But there’s still room for improvement. Andrius Šlekys, board member and head of business development at Lithuanian laser microfabrication solutions developer Workshop of Photonics, says that the government should focus on incentivising the best startups to grow, rather than spreading its resources too thinly by supporting a large number of startups.
”We’re definitely part of the global tech talent shortage too, with STEM talent often going to established corporate companies instead of startups,” he says.
He adds that despite the shortage, what pushes the sector forward is still the considerable amount of tech talent ready to work in the deeptech sector in Lithuania.
“Talented people who’re not afraid to get their hands dirty, who have good educational qualifications and experience and don’t choose the easy path of working at established firms and come back to Lithuania, roll up their sleeves and build,” says Šlekys.
Favourable tax regime
Lithuania’s favourable tax and legal regime empowers tech companies to grow and attract investment and the rapid growth momentum is also expected to result in large scale exits. This in turn creates a snowball effect as tech founders with capital from successful exits invest in new startups.
Some of the country’s tax incentives for innovation include a one-year corporate income tax exemption for small businesses, a tax deduction for companies investing in digital transformation and a shorter depreciation period for assets used in R&D. More than 100 founders have moved to Lithuania using the startup visa that was launched in 2017.
The Baltic region — Estonia, Latvia and Lithuania — also has some of the best regulations in Europe for companies that want to offer stock options to their employees, according to VC firm Index Ventures. This makes it easier for startups to attract and retain talent, which has a positive effect on the entire tech ecosystem.
However, not all founders agree that Lithuania’s tax and legal regime have much to do with its growth in innovation. “I don’t think the tax regime particularly drives the establishment of new companies because typically entrepreneurs don’t sit down and say ‘this is a great tax environment to start a company’,” says Nainys.
“But it does help the company grow once it’s established. Another important factor is the Lithuanian government and European Union’s investment into the deeptech and life sciences sectors, which is certainly starting to bear fruit and was also helpful in the early stages of our company,” he adds.
A robust life sciences sector
The life sciences sector in Lithuania is one of the fastest growing in Europe, expected to contribute 5% to Lithuania’s GDP by 2030. In 2021 alone, Lithuania’s life sciences sector grew by almost 87% and generated revenues of €2bn, according to Innovation Agency Lithuania.
“The life sciences sector is one of the key pillars of the Lithuanian deeptech ecosystem — in addition to physical sciences, machine learning-driven ICT solutions, robotics, new energy startups, spacetech and a growing defence and dual-purpose segment,” says Dominykas Milasius, cofounder of Lithuanian deeptech Delta Biosciences and investment partner at Baltic Sandbox Ventures.
He adds that life sciences “have arguably become the most visible Lithuanian deeptech export”, with notable developments ranging from the acquisition of a local biotech giant “Fermentas” by Thermo Fisher Scientific to recent Taiwanese investments into lasers, semiconductors and medical AI.
Based on data from Innovation Agency Lithuania, there are currently around 68 life sciences startups in the country.
“We have quite a lot of core competencies within Lithuania not only in molecular biology technologies but also within the AI sector in life sciences — two core areas are diagnostics of diseases from images like radiology or protein and molecule library development. So that’s a sector that’s certainly growing and in 2023, we’ll see a couple of companies in this sector progressing further,” says Nainys.
Resilience in uncertain times
Lithuania is now faced with uncertainties like the wider market downturn and the war in Ukraine. And while the investment in deeptech is increasing across the Baltic region — with $90.3m received in 2022, in comparison to 2021’s $69.4m — it’s still significantly lower than in the rest of Europe.
“There’s still a lot to be done not only in Lithuania but in the EU. Larger funding rounds are mostly led by outside investors, cross-border private equity and venture capital is still lagging, and more ties with academia are needed,” says Milasius.
But Rudokienė emphasises that despite the challenges, the industry has been surprisingly resilient. “Even with the pressures of geopolitical and macroeconomic conditions and investors tightening their purse strings, we are still very surprised by the numbers of our startups — they are really resilient and actively hiring, growing their sales, entering new markets and paying more taxes to the country’s budget,” she says.
Milasius adds that he believes that over the next few years, the Lithuanian deeptech sector is set to demonstrate better growth than most continental counterparts.
“While most of the early-stage funding for deeptech has historically come in the form of government grants or acceleration tickets, more and more local angel investors and VCs now understand deeptech better and are coming in at earlier opportunities,” he says.
Milasius says that the way forward is to leverage deeptech to insulate Lithuania from further geopolitical risk.
“In my view, Lithuania could actually turn this geopolitical crisis into a geoeconomic opportunity,” he says. “By building up the national deeptech ecosystem into an engine that regularly produces world-class IP, attracts international investment and builds trust with allied nations and ecosystems.”