Deep Tech
The SciTech revolution
Acronyms, lexicology, and trendy catchphrases come and go – sometimes lingering for a brief but bright moment, while at other times they seem to stick in our memories long enough to generate a life of their own. Such is the case with ‘deep technology’, or Deep Tech, which describes the increasing shift away from traditional sources of fundamental innovation and discovery to a more democratised playing field – you no longer need to be a trained scientist or have deep pockets (pun intended) to bring a genuinely innovative idea to market. A number of changes are driving this change – the greater accessibility to knowledge, skills, information, and funding sources. The Deep Tech sector is being driven by emerging platforms that could spark the next industrial revolution, but one driven by science and technology – the ‘SciTech’ revolution. However, this fragmentation and disparity is making it more difficult to pool resources, requiring new models of collaboration, funding, and R&D initiatives.
Deep Tech – more than just potentially disruptive technology - The term has actually been used for decades, but mostly away from the public limelight in the R&D labs of large defence and telecom corporations, such as Lockheed Martin’s ‘Skunk Works’ division, Raytheon Technologies, and Bell Labs. The term essentially originated to describe a science and engineering technocracy, or an enterprise which pursues fundamental science discovery and engineering innovation.
The democratisation of innovation - An increasing trend amongst technology startups, especially those of the Deep Tech variety, is the wider source of ideas – and places to incubate those ideas into potential businesses. Although traditional sources of R&D will remain important, such as universities, large corporations, and governments, the democratisation of data, knowledge, and expertise, along with cheap or even free sources of startup funding, such as crowd sourcing, means that almost anyone can develop an idea into a viable venture. In a 2017 report by venture capital (VC) firm Atomico, a survey of over 2,000 tech startups (including Deep Tech) showed that more than 60% of company founders did not have a technical background.
Falling barriers to innovate - In large part, the democratisation of innovation is being driven by declining barriers of entry. Many of the tools needed for innovation, which have historically been the purview of traditional research establishments, are new easily accessible to almost anyone. It has never been easier for innovators to imagine an idea and bring it to life. Computing power is increasingly cheap and powerful – our mobile phones are more powerful computers than any NASA scientist could dream about when working on the Apollo space programme – and cloud-based solutions further boost data storage and analytics. Linux and open source software make it relatively easy to gain access to the tools needed to design and develop ideas, while the burgeoning area of 3D printing and novel materials is making it easier to construct prototypes and validate designs.
While traditional R&D and innovation in the economic cycle typically involves incremental changes to prevailing technologies, there are a number of key differences with Deep Tech innovation. Deep technologies are fundamentally novel and make significant advances over contemporary technologies. Consequently, they require significant amounts of R&D effort, in addition to lengthy development timelines, before they can mature to become potential marketable businesses or consumer applications.
Solutions for challenging global problems - Many Deep Tech ventures are seeking to address major global challenges, such as climate change, sustainable food production, and chronic health conditions associated with an ageing human population. In this backdrop, Deep Technologies are being increasingly viewed as potential solutions for pressing issues facing the world, where incremental advances in contemporary technologies are no longer adequate to meet future demands. Furthermore, as society realises that the unsustainable historical economic models are no longer feasible, Deep Technologies are becoming increasingly important to supplant traditional value chains.
Many of the initiatives in the Deep Tech sector aim to address major societal and environmental problems, and could have a significant impact in the long-term. A significant proportion of the emerging Deep Tech startups intend to tackle a wide range of United Nations’ sustainable development goals (SDGs).
These technologies could lead to the creation of entirely new markets, business models, and economies, and potentially replace those which we have historically relied on – the way in which we work and live would never be the same again. Furthermore, given the extent of innovation, the underlying IP is difficult to replicate and extensively protected by patents, providing lucrative competitive advantages and significant barriers of entry to any competition.
New technology platforms - Similar to how innovation in the past few decades has been largely driven by a handful of key technology platforms, such as silicon chips, the internet, and telecommunications, the Deep Tech sector is being driven by emerging platforms that could spark the next industrial revolution, but one driven by science and technology (the ‘SciTech’ revolution). These include, amongst others, quantum computing, AI and machine learning, and gene editing technology in biotechnology and medicine.
Moreover, the convergence of multiple technologies augments their potential applications and use cases to solve complex problems or design new tools to develop further solutions. For example, the use of machine learning, AI, and powerful algorithms to develop ‘in silico’ methods to predict the structures of complex proteins and molecules based on DNA sequencing data alone, without the need to employ expensive and time consuming X-ray crystallography techniques.
The investor community seems to have caught on to these key differences and appealing business prospects. An increasing amount of investor capital is being allocated to Deep Tech companies, and according to Boston Consulting Group (BCG), the aggregate global private investment in seven key subsectors increased by more than 20% per year in 2015-18 to reach around USD18bn.
Source: BCG, Parker & Longbaugh
The role of the US as the incubator of revolutionary SciTech is waning - As could be expected, the usual suspects dominate the regional makeup of the sector, such as the US and Europe. However, although most of the Deep Tech companies are based in the US (according to BCG), the number of companies in the country, as well as its global market share, have been declining since 2015. Increasingly, and as with other spheres, the centre of gravity has been shifting to emerging markets, such as Asia (China in particular), the Middle East and Africa (MEA), and Latin America.
Source: BCG, Parker & Longbaugh
Place your bets
More investor capital is heading to Deep Tech - Amongst the investor community, there has been an increasing shift in capital from traditional technology-driven startups (those focusing on incremental advances in prevailing technologies for consumer market applications), to emerging enterprises performing fundamental research in science and engineering. A large part of this could be due to Deep Tech startups needing significantly more capital and time during the early phases, especially if they do not have any potential marketable use cases.
A broad range of funding and the greater role of CVC - In contrast to traditional tech-driven investment funding cycles, Deep Tech startups rely on a broad mix of private capital, public non-equity funding, accelerators, incubators, and crowdfunding. In addition, private/public initiatives are increasingly important, especially at the early stages in traditional R&D establishments, such as universities and public bodies, while corporate venture capital (CVC) plays a role at latter stages of the development cycle, where not just monetary capital, but industrial and financial markets support is critical.
Source: BCG, Parker & Longbaugh. Note: Quantum computing data represents only eight companies, with two raising a combined USD64m in 2016-17.
Venture capital is becoming increasingly less risk-averse - Venture capital has clearly taken notice of the appealing prospects of Deep Tech firms, with global deal values at around USD100bn in late 2018, increasing more than 40% from 2017, according to data from Crunchbase. In addition, deal volumes were also up around 40% in the same period, approaching 10,000 rounds. Although there may be a wide range of drivers affecting investor appetite in recent years, not least the extremely low interest rate environment lasting for an unprecedented length of time, there seems to be a feeling that the valuations of many tech ‘unicorns’ are approaching values that are becoming increasingly unsustainable. However, it is also a sign that VC, especially CVC, is becoming increasingly less risk-averse and willing to place long-term investments in novel technology, which may not emerge with a viable marketable product.
Source: BCG, Parker & Longbaugh
High demand for investor audience engagement and communication - In terms of investor audience engagement, Deep Tech firms hold more funding events than their counterparts. This reflects the demand placed on Deep Tech companies by the investor community to provide regular communication events, and update key stakeholders on the progress of their R&D. However, given the nascent stages of many of these firms, they face considerable challenges in harbouring the appropriate in-house financial PR and investor relations capabilities to effectively communicate their core message and corporate story. A large part of this trend may be largely driven by the increasing CVC investment in the sector, requiring greater focus on stakeholder communication and engagement.
Source: BCG, Parker & Longbaugh
On a regional basis, the US and China combined represented about 80% of the global private investments in Deep Tech companies in 2015-18, with USD32.8bn and USD14.6bn invested in each country, respectively, according to data compiled by BCG. Although the US dominates in total investments, Greater China (mainland China, Hong Kong, Macau, and Taiwan) has shown the highest growth in Deep Tech investment, increasing at a CAGR of more than 80% in 2015-18, with the US at 10% in the same period.
Source: BCG, Parker & Longbaugh. *Greater China – mainland China, Hong Kong, Macau, and Taiwan.
The role of governments has been changing - Once the major driving force of R&D spending, the role of governments has been shifting. In the US, government spending on R&D declined from 1.2% of GDP in 1976 to 0.7% in 2018, based on data from the American Association for the Advancement of Science.
In part, this reflects the changing demographics of R&D – the significant federal spending on national security and defence projects, especially during the Cold War years, has been eclipsed by the R&D efforts of private companies focused on consumer products, medicine, infrastructure, and transport. In addition, the US government may find that outsourcing R&D to private firms is a far more efficient method, while maintaining its own select federal R&D infrastructure for the most sensitive of needs. Moreover, the US government has historically been the early adopter of new technology platforms, primarily those initially developed for defence purposes, but which would later become dual-use civil applications, e.g. GPS and the internet.
R&D by the private sector has taken a more prominent role in the US - In this respect, areas where the US government was the only real source of R&D funding have gradually transitioned to the private sector, where efficient management and the sourcing of human capital may be more cost effective. For example, the opening of the satellite launch industry to private firms (SpaceX, Blue Origin, Virgin Orbit), and the greater collaboration between NASA and private firms to sustain the US space programme.
Government R&D spending in China is driving innovation in next gen technologies - In China, the picture is very different. Government spending on R&D has increased by about 400% on a purchasing-power-parity basis over the past two decades to reach over USD400bn per year and approach that of Europe and the US, based on data compiled by the Economist. While much of this can be attributed to the explosive economic growth, the government in China isn’t looking to reinvent the wheel. Instead of relying solely on contemporary technologies, China has taken a ‘leap-frog’ approach by focusing on emerging technology platforms that are likely to shape the innovation of tomorrow – AI, quantum computing, renewable energy, and advanced materials.
Deep Tech initiatives typically require significantly longer development timelines before they can become potential marketable products. Moreover, a significant amount of R&D can occur before the incorporation of startups. Consequently, the incorporation stage could be viewed as a milestone, rather than a nascent stage of a venture, and demonstrate that the science and engineering has reached a critical stage, sufficient enough to target end-market consumers.
Source: BCG, Parker & Longbaugh
Development timelines vary, but Deep Tech generally requires longer time to mature - In addition, the development timeline varies significantly across technology type and use case application. For example, data from BCG shows that a Biotech startup can take an average of four years, including around two years from incorporation and another two years to reach the market. In contrast, a Blockchain project averages around two and a half years, with around one and a half years to first prototype and another year to reach the market. However, in contrast to other tech ventures based on contemporary technology, Deep Tech development takes considerably longer across the board.
Concomitant with the range of development timelines, the funding and investing requirements can vary substantially across technologies and end-market applications, with a typical Biotech prototype requiring on average around USD1.3m, while a Blockchain prototype needs around USD0.2m, according to data from BCG.
Source: BCG, Parker & Longbaugh
From an investor point of view, determining the risk/reward of a potential Deep Tech candidate can be far more complicated compared with traditional tech startups. There is clear market risk associated with investing in a Deep Tech firm at an early R&D stage that has yet to define a potential use case or an end-market. In some cases, there may never be a viable use case, or a viable market has yet to develop, which could take considerable time, long after investors would like to see a return on their investment. In addition, there are limited KPIs or adequate methods to determine whether an idea has market potential.
Investors face challenges in determining their risk/reward parameters - There is also significant technology risk associated with a nascent Deep Tech startup, and the problem becomes particularly acute if investors do not have the relevant technical expertise to fully understand the technology. Some investors may counter this by collaborating with technology-driven advisory firms or larger institutional investors who may harbour the required in-house skills. In addition, the burgeoning but often times opaque network of experts and key opinion leaders (KOLs) can be tapped into. However, this can be costly and requires evaluating patents and IP filings, assuming the startup has reached that stage, which can take considerable time.
Furthermore, the lengthy development timelines are particularly challenging for investors who require a rapid return on investment. Given the high attrition rate and relatively low proportion of successful exits in most emerging technologies, investors may seek a well-proven investment strategy, such as the Biotech and Pharma sectors, where traditionally Big Pharma steps in to acquire startups to strengthen their own development pipelines. Consequently, investors may enter at a later stage, but at the cost of higher valuations and less favourable risk/reward.
The Deep Tech ecosystem
What we have today is an interconnected ecosystem comprising multiple stakeholders. Each stakeholder brings unique capabilities based on a specific area of research or expertise, technology, sector, or even a general mission or vision. These players interact in ways which we have not seen before – rather than discrete units of innovation and business, the interactions are dynamic.
The Deep Tech ecosystem is dynamic, decentralised, and defined by the exchange of ideas and capabilities - The multitude of diverse players can rapidly change, depending on the problem being addressed and the technological challenge. Relationships are not always formally defined by contractual obligations, but rather collaborations, which may exist temporarily to benefit from mutual synergies. There is less centralised command and control, and more interconnected lines of communication to disseminate ideas and results. However, the key to all this is the exchange of currency between the ecosystems – not just the monetary variety, but rather knowledge, data, skills, expertise, networking, and market access.
Source: BCG, Parker & Longbaugh
The Deep Tech ecosystem comprises a broad network of focal points around specific areas of research, technologies, sectors, and strategic mission goals. However, the network is quite distinct from traditional technology-driven business value chains, such as auto manufacturers and their suppliers, airlines and aircraft manufacturers, and media companies and content producers.
The Deep Tech ecosystem operates a ‘win-win’ model - While traditional innovation in the tech sector is driven by individual players who seek to gain a competitive advantage against their peers, the Deep Tech ecosystem operates a ‘win-win’ model. In this case, the participants need to identify what they can contribute to develop the ecosystem and specific technology platforms, before crystallising any individual gains. As the technology matures and the focus shifts to marketable solutions, competition should return with players developing their own unique value for specific business applications.
There are a number of key factors that set the Deep Tech ecosystem apart from traditional sector-specific models.
A wider range of players from more diverse backgrounds – most Deep Tech innovators are trying to solve global problems, which require ‘blank sheet’ innovation and novel ideas. Consequently, many of the emerging technologies are at relatively nascent stages of development, with innovators from a wide range of disciplines and expertise.
Relationships are highly dynamic and rely less on centralised organisation – the interdependencies between the players in the ecosystem are based on seeking mutual synergies in expertise, knowledge, applications, and developing workable solutions. Therefore, interactions between innovators are usually fluid, and may last for a brief period of time, depending on the outcome of interactions. In addition, players will form multiple interactions with partners from disparate backgrounds to determine whether there are previously unidentified potential areas of collaboration.
Cash is not the only currency of capital – when it comes to tech, cash is not always ‘king’. Knowledge, expertise, data, and analytics – this is what drives innovation, and in the Deep Tech ecosystem, the exchange of these capabilities is for more relevant. Although financial capital will always remain important, human capital and technical capability carry far greater weight. Moreover, contacts and market access are also key to success for Deep Tech ventures. This is where private capital, and CVC in particular, plays a vital role in fostering startups with their business acumen, management advice, and go-to-market strategies.
The changing landscape of technology-driven startups and the burgeoning Deep Tech ecosystem is posing significant challenges for traditional companies and investors alike. Established players using legacy business and innovation models may struggle to adapt to the highly dynamic interdependencies of the ecosystem, while VC and seed investors may need to adjust their risk models to reflect the risk/reward associated with the Deep Tech sector. Moreover, each stakeholder now faces a learning curve in terms of defining methods to interact with other participants in the ecosystem to align strategic objectives, create value, and develop strategies.
Investors are taking a ‘beyond the horizon’ view, with sustainability the key priority - Investors appear to be taking a very long-term view, and sustainability is at the top of the list in terms developing an investment strategy – but not just in terms of green credentials. Sustainability in this sense seems to be a business model that will adapt to the inevitable change in the global economy – the transition away from fossil fuels driving our industries and transport, the growth in the circular economy, the change in monetising human capital from activity and productivity to knowledge and analytics, the recycling of natural resources, and the gradual decline of inefficient historical industries and business models. In this context, the Deep Tech ecosystem provides investors with appealing entry vehicles to gain exposure to this transition.
Corporations and startups can find synergistic relationships - Corporations are taking a greater interest and more prominent role in fostering Deep Tech startups. Large companies have traditionally acquired startup as a means of gaining innovation, in addition to partnerships, joint ventures, and licensing agreements. However, the breadth and scope of the Deep Tech ecosystem means that traditional models may not provide the adequate flexibility that most corporates and startups need. In most interactions, corporations and startup have developed complimentary relationships – startups cannot mature a new idea to market by themselves, as they need access to development infrastructure (labs, testing tools, and production lines), while corporations desire access to the core technology the startups are developing.
From the point of view of startups, corporations provide a launch pad to the market as they can provide access to key end-markets, an existing customer base, and potential distribution networks. Furthermore, the technical and industrial capabilities of corporations can provide the necessary due diligence needed to mature the technology and approve its marketability, for example, by providing real world testing conditions to demonstrate proof of concept. In addition, corporations offer the physical infrastructure that digital tools alone cannot replace, such as production lines and gaining access to supplier networks.
In conclusion, watch this space. There is clearly a significant transition occurring to replace traditional socioeconomics, which have been largely unchanged since the industrial revolution, to meet the pressing global challenges we face, and the solutions to the problems lie in the SciTech revolution.