A deeptech investment model emerges to meet the moment’s ills

Covid-19 and the push for vaccine development has pulled many investors into the spotlight with an imperative to invest in technologies that address the biggest issues of our time. Is this the origin of a new public-private partnership model?

Investment in deep technology, such as solutions that address climate change and covid-19 vaccine development, are on the rise and the space already boasts unicorns, according to a new report by Boston Consulting Group (BCG) and Hello Tomorrow called “Meeting the Challenges of Deep Tech Investing.”

The mRNA technology that led to the development of covid-19 vaccines is cited as one example of transformative deeptech. But the space boasts other well-known VC-backed unicorns, including plant-based meat provider Impossible Foods, agtech platform Indigo AG, as well as electric charging station provider ChargePoint, among others.

However, the barrier for entry in the sector is higher than most tech sectors, has a longer runway to market, a higher initial investment cost and fewer successful companies in the field to point to. But there’s potential to accelerate growth in this space if a new investor model can be built, according to the report.

Resolving the current investment model

The report outlines how the investment model in deeptech is changing. For one, VC investors have a history that is aligned with deeptech, as evidenced in their longstanding interest in advanced science and tech. But investors have drifted away from that in favor of information and communications or biotech models.

Investors have also shied away from deeptech since they associate it with high risk. But they are at the greatest risk if they ignore deeptech, the report said. And while barriers to fundraising are expanding, barriers to innovation are falling, which the report said would enable more investment opportunities in deeptech.

The report said a new deeptech investor model is emerging, which boasts a problem-oriented mindset and in-house expertise and ecosystems, as new funding structures and financing tools and a more accurate narrative take shape around deeptech

But even with this, questions remain about the industry’s effectiveness.

Telling the story better

The deeptech story remains vague. The report mentioned that deeptech evangelists are still learning how to describe the tech and successes achieved.

“We need to do a better job telling the many success stories and exit opportunities in deeptech,” said Massimo Portincaso, chairman of Hello Tomorrow and co-author of the report.

“Deeptech still lacks a clear narrative to educate investors and attract more funding,” he added. Despite this, the deeptech industry has boasted meaningful gains in recent years.

A total of $60 billion was invested in deeptech globally in 2020, compared with $15 billion in 2016, according to the report. Plus, like much of the venture industry up until now, the deeptech landscape is geographically concentrated in the US, which comprises 75 percent of all activity, with other venture hubs in Europe, China and the rest of the world grossly underfunded.

Even with significant increases in recent years, many of these technologies are often esoteric, and are usually developed by scientists and engineers, who in many instances aren’t able to ‘talk the talk’ to connect with VC investors.

“A pitch isn’t a thesis and many deeptech scientists don’t understand the grammar of venture capital,” the report said.

The report noted that scientists and engineers tend to underplay their successes, focusing on evidence-based uncertainty, which is not often the case when enthusiastic and confident entrepreneurs pitch VCs.

“They [scientists and engineers] often elaborate on the complex scientific and technical features of their ventures rather than the end applications and business potential,” according to the report.

But investors are, in some cases, bridging the gap between knowledge and capital themselves. The report found that investors are tapping in to expertise to better understand deeptech, as 79 percent of deeptech investors made use of external experts and 37 percent hired graduate-level science degree holders or engineers.

Risks remain

Deeptech investing is risky, and it’s generally more so than conventional tech investing, but not conclusively so. The report stated that 69 percent of deeptech investors disagree with the idea that market risks, as well as those risks associated with science and technology, are “too high.”

The report recommends that a deeptech investing narrative should acknowledge that risks are high, but they can be mitigated. In addition, deeptech already has an impressive track record. And the report noted that deeptech has the potential to find solutions for a host of societal ills, including pandemics.

“Deeptech gives investors the chance to be part of the next wave of innovation and to solve some of our most fundamental problems,” said Antoine Gourevitch, co-author of the report and managing director and senior partner at Boston Consulting Group.