Federico is the CEO of EIT Digital, Europe’s largest open innovation ecosystem focusing on deep tech. Check out Federico’s profile here.
When you think about risk, you probably want to avoid it. You instinctively try to take precautions against threats. You pay for insurance to reduce the risk of an unexpected event. You most likely hedge against risk. But you also know about successful high-risk, high-reward plays.
As the CEO of EIT Digital, I work in the world of digital innovation, where risk is accepted as an essential element of progress. New fields like AI, Industry 5.0 and deep tech bring risks for investors and society, but the benefits for society—and the financial rewards of success—are also obvious.
While it is important to understand and manage the risks of innovation and digitization, you sometimes need to take those risks. The approach to risk should involve foresight, preparation and a willingness to be bold— preferably in that order. In fact, I firmly believe Europe must increase its appetite for risk in digital to stay competitive.
Today’s Important Risks
It is important to understand the types and extent of risks posed by an increasingly digital world.
AI that scrapes the internet for data runs the risk of inaccuracies because the web contains inaccurate information. AI algorithms that are created and deployed by humans can pick up unintentional human bias or can intentionally be programmed to generate misinformation.
Awareness of these risks helps to contain them, through private efforts to eradicate bias as well as regulations aimed at misinformation. The Harvard Business Review describes concrete efforts that can be taken to prevent biased algorithms. As for misinformation, the European Commission’s Horizon magazine explains that humans using AI for bad purposes can be countered with AI designed to fight falsehoods.
AI and deep tech bring about the risk of job loss, as computers are able to work faster and cheaper than humans, with increasing quality. I would argue jobs are changing, so we need new skills. The need to reskill and upskill has always been a cost of progress. For example, reskilling programs could transform retail workers into software developers or cloud engineers and a programmer could be reskilled to become a systems analyst.
The most effective way to address skills shortage is a systemic approach. The European Commission’s European Skills Agenda, set for five years, is a good framework to strengthen sustainable competitiveness, social fairness and resilience of the European workforce.
Regulation And Risk From A European Perspective
The EU also seeks to counter risks through regulation. But regulation can pose a risk, as investors weigh the possibility that new ideas will be curbed by new or existing rules. What’s more, regulations can miss their intended goal and do more harm than good. For example, regulations like the General Data Protection Regulation and Digital Markets Act can produce new obstacles.
As the Harvard Business Review explains, “A concern with the European approach is that it might be too blunt, with the risk of constraining value creation of all sorts of platforms that might fall under gatekeeper status, doing little to promote competition and in some cases producing unintended consequences that actively harm competition.”
The newly approved European Data Act is regulation with the goal of opening up data rather than restricting it, and the act has been described as an effort to help European companies compete with American platforms that have been winning the data competition.
By making it clearer who owns nonpersonal industrial data and data from smart devices, the Data Act is meant to enable greater commercial use of that data. This approach is designed to enable greater application of data from Industry 5.0 applications, though some express concerns that the Data Act may not work as intended, according to Politico.
Investors See Risk Differently: Long-Term Plays Drive The Agenda
Investors are showing increasing willingness to take risks on digital technologies in Europe. We see a growing appetite for investment in deep tech, which involves applying digital technologies to areas beyond the digital sphere, like life sciences, quantum computing or the expanding field of space tech.
European deep tech startups raised $17.7 billion in 2022—22% less than the 2021 total, but still up 60% in 2020, according to a report by Dealroom. In the second half of 2022, deep tech had the second largest rate of growth in venture capital funding after energy, the report says.
Europe still needs to do much more to even out the playing field in deep tech investment. Even European deep tech startups receive nearly half of their investment from the United States and Asia when it comes to later stage investment.
Managing Risk
Companies often struggle when evaluating risk because they try to go it alone. Open innovation frameworks and vibrant ecosystems based on the knowledge triangle concept—integrating activities in education, innovation and business creation—can help companies to have a broader perspective.
This is especially true in industries—like the deep tech sector—where scaleups have a longer development times and benefit from industry connections. This is also true when companies face make-or-break innovation challenges and are encouraged to use existing external knowledge rather than reinventing the wheel. Ecosystems offer a safety net. Diversity of knowledge can fill the needs of digital entrepreneurship in the areas of technology, talent, skills, business know-how and capital.
Risk also means change. Your team must grow and adapt. When scaling, the team structure at a startup often cannot adapt to the growth organically or fast enough. Make sure you are ready to make serious changes, even on the management level, to adapt.
Finally, it is a risk to create products that the market doesn’t need because you love your idea. Mitigate this risk by looking for a solution for a market need instead of a market for your idea.
The only way to handle that risk is validation, validation, validation. You will have to make decisions, and you might find yourself seeing a different way forward than anyone else. That’s okay. There is immense power to standing in your own truth.
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