Deep Tech Investment Insights: Current Gaps and Future Pathways
Supporting deep-tech solutions is integral to solving our toughest global challenges (like climate change and food security), but progress is hindered by multiple points of friction in the investment chain. These are caused by paradoxes in stakeholder mindsets and biases in traditional investment models.
This session discusses how start-ups and interested investors can navigate incumbent investment models to realise new support pathways for such innovations that bring with them complex stakeholder relationships.
Here are some highlights from the session that we hope you’ll find useful!
There Are Structural Hindrances in the Existing VC Model
- Most VC GPs are used to the structure of large funds, comforted by fixed management fees AUM. Moving away from their traditional investments could limit their ability to attract capital from LPs.
- Most of these funds categorize deep tech as high-risk and un-investable. If a fund’s cycle, at ten years, is shorter than the runway from laboratory to exit, some deep tech ventures can look uncommercial.
- Deep tech evaluation requires scientific/engineering expertise and too few funds have suitably qualified experts in-house or a network of advisors, who can both understand the science and communicate well with the team. According to our latest survey, 81% of deep tech ventures confirm that “investors on average lack such expertise to assess deep tech potential”
There Are Structural Hindrances With LPs in the VC Model
- LPs are still reluctant to invest in deep tech funds due to a perceived mismatch with their expected risk/reward profile. They are often neither sufficiently qualified to understand the science behind deep tech nor, as a result, exposed to it. Risk-averse intermediaries such as banks will also dissuade LPs from deep tech investment, or just don’t have the right narrative to convince them.
- The dominance of the biggest players is reinforced as LPs first look at a fund’s track record and founders’ names, instead of its approach: according to Mountain Ventures, 60% of LPs say that track record is the number one criterion.
- While the basis is sound, it applies largely to existing funds, which have returned on digital innovations, less so highly technical innovations. Track record in this case, might not be entirely relevant.
There Are Gaps Between CVCs/VCs and Deep-Tech Start-Ups
- Financial VCs have obligations to LPs that are still driven predominantly by timely return. They want to see exits sooner rather than later.
- Some deep-tech ventures are too academic or technical, making it hard for VCs to see how their tech can turn into a viable product that people can take to market, get revenue off, scale, and get an exit from.
- CVCs sometimes require portfolio companies to work exclusively with the corporate parent. This can be detrimental to the start-up’s overall ability to create value, which can be contentious with founders and existing investors.
- Founders should learn to provide a better understanding of the real-world application of their technology, and therefore, what the revenue and potential exit looks like.
- Founders and CVCs must be prepared and equipped to creatively structure relationships that provide commercial advantage without compromising on overall growth of the venture.
There Are Gaps Between Corporates and Deep-Tech Start-Ups
- When seeking to collaborate, timeline is a problem. Corporates tend to take their time, given the maze of internal approvals that need to be sought, but start-ups dislike it.
- Long term interest between corporate and start-ups might diverge over time
- Corporates work much better with matured technology (minimally a Minimum Viable Product). If it is just a concept, corporate will probably only be willing to fund a small project to test the concept.
- Corporates are very happy to co-develop, but this doesn’t always work with start-ups because the co-development path to market could be long.
- For the relationship to be successful, they need to work out the mechanics of the relationship, especially the timelines, or issues like co-investment in co-development.
There Are Gaps Between VCs and Corporate LPs
- VCs are interested in financial return, while corporates seek to participate as LPs to expand their innovation sourcing networks, not only to seek financial returns.
- This difference in motivations makes it difficult for corporates (who tend to be best type of investors for deep tech funds as they can act as future acquirers and customers of the start-up) to feel comfortable deploy into VCs.
- This gap can be bridged through restructuring the nature of engagement between VCs and corporate LPs e.g. GPs can consider allowing significant corporate LPs to place relevant executives on the fund’s investment committee and participate in both deal selection and evaluation.
Other Gaps Faced By Deep-Tech Start-Ups
- Access to funding.
- Access to business talent because the brightest scientific minds in the world do not necessarily make the best entrepreneurs.
- Access to customers — for deep tech we are mostly talking about B2B businesses.
The Funding Gap
- Public funding is key to early-stage start-ups. Start-ups should first explore the various schemes that are available in the public sector. Governments need the start-ups to be able to contribute towards high value job creation, and sustainable economic growth.
- For bigger investments, most large corporates need an investment committee. However, that might be overly complicating. Most departments have large operating budget that can cover the capital. This changes the decision maker in most investments, at least for corporations, making it easier for start-ups to get funded.
The Talent Gap
- There has been a big talent gap on the commercial side (commercial talents that can help market and sell the product). Some deep-tech companies severely lack designated product people within their organisation.
- Most deep-tech companies do not have the money to pay for a really good product person, or go to market strategist, but they need them earlier than the companies think.
- It is hard to find product talent in Asia, but with COVID and remote working, companies are now able to attract a lot more international talent.
- Large mobile or e-commerce companies are not as popular anymore. The next generation wants to work on stuff that is much more important to the world. Deep tech start-up founders need to learn how to craft the right story to bring onboard the best talent.
- Open commercialisation is a novel concept proposed during the session. Similar in concept to open innovation, it encourages collaboration between parties in the ecosystem, but slightly further downstream.
- With this we hope to drive more partnerships between corporates, where a lot of the commercial talents are housed, and perhaps have some of the leaders from these various business units that reside within the MNCs come in and help deep-tech start-ups.
If successful, open commercialisation could lead to very different ways of how to come to market or share risk and reward. The future is certainly interesting!
Special thanks to our speakers:
Check out the paper on which this session was based here.