The Deep Tech Investment Paradox: a call to redesign the investor model
While digital transformation is accelerating across world economies, catalyzed by the Covid pandemic and led by the GAFAMs, BATXs (tech giants including Google, Apple, Facebook, Amazon, Microsoft, Baidu, Alibaba, Tencent, Xiaomi) as well as data-savvy startups, a deeper revolution is on the way.
What we call deep tech ventures are at the forefront of this wave of technological innovation. One of the largest constellations of satellites in orbit is launched by a startup (Planet Labs); another startup is working on building supersonic airplanes (Boom Supersonic); others lead the synthetic biology revolution (Ginkgo Bioworks, Zymergen); more of them are revolutionizing food by cultivating cell-based meat (e.g., Memphis Meat) or through precision fermentation (e.g., Impossible Foods), just to mention a few.
Some even have ambitions to unlock the power of atoms: Commonwealth Fusion Systems and Seaborg Technologies are planning to build the next small-size nuclear (fusion and fission respectively) reactors by 2025, D-wave is developing quantum computers and Sila Nanotechnologies uses nanoparticles to improve Lithium-ion battery capacity.
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While there is no such thing as a “deep” technology, successful deep tech ventures all share a unique approach and differentiate themselves with four main attributes (see our report Deep Tech: The Great Wave of Innovation)
Successful deep tech ventures are problem-oriented. Very often they work on solving large and fundamental problems: 97% of deep tech ventures contribute to at least one of the UN’s Sustainable Development Goals.
They look at using the best existing or emerging technologies to solve the problem at hand. As a result, they play at the convergence of technologies: 96% of deep tech ventures use at least two technologies and 66% use more than one advanced technology.
They generate defensive IP: 70% of deep tech ventures own patents in their technologies.
They are shifting the innovation equation from bits alone (digital) to “bits and atoms” (physical). They build on the ongoing digital transformation, the power of data and computation, to develop mostly physical products, rather than software. About 83% of deep tech ventures are building a physical product.
They are at the center of a deep interconnected ecosystem: because of the complexity of the task at hand and the deep scientific background needed, it is impossible for two people in a garage to come up with a meaningful deep tech innovation. Some 1,500 universities and research labs are involved in deep tech, and deep tech ventures received some 1,500 grants from governments in 2018 alone.
Despite representing a small minority of startups, deep tech ventures have an outsize impact because they attack large-scale issues and because their work is both futuristic and practical. Deep tech ventures reside in what Donald Stokes termed “Pasteur’s Quadrant,” combining a quest for fundamental understanding with applied research.
Despite the inherent risks of failure, businesses and investors have shown increasing interest in deep tech. According to our preliminary estimates, investment in deep tech (including private investments, minority stakes, mergers and acquisitions, and IPOs) more than quadrupled over a five-year period, from $15 billion in 2016 to more than $60 billion in 2020. The average disclosed amount per private investment event for startups and scale-ups rose from $13 million in 2016 to $44 million in 2020. For early-stage startups, the most recent survey by Hello Tomorrow found that the amount per investment event increased from $36,000 to $2 million in the period from 2016 to 2019. And funding sources are expanding. While information and communications technology (ICT) and biopharma companies continue to invest substantially in deep tech, more traditional large enterprises are becoming increasingly active. For example, Sumitomo Chemical has signed a multiyear partnership with Zymergen to bring new specialty materials to the electronics products market, and Eni has invested $50 million in Commonwealth Fusion Systems and joined its board of directors. Bayer has joined forces with Ginkgo Bioworks to reduce agriculture’s reliance on carbon-intensive nitrogen fertilizers. The resulting venture, Joyn Bio, uses synthetic biology to engineer nitrogen-fixing microbes that enable cereal crops to extract nitrogen from the air in a usable form. Sovereign wealth funds are playing too. Singapore’s Temasek Holdings invested in JUST (plantbased egg alternatives), Commonwealth Fusion Systems (commercial fusion energy), and Memphis Meats (animalcell-based meat). More and more mainstream companies and institutions are recognizing that solutions to big problems—and the future of innovation—lie in deep tech.