Primed to take off: the rise of DeepTech

November 2022  |  FEATURE | FINANCE & INVESTMENT

Financier Worldwide Magazine

November 2022 Issue

DeepTech – a phrase coined by Swati Chaturvedi in 2014 – essentially encapsulates those technologies that are not focused on end-user services, such as artificial intelligence (AI), robotics, blockchain, advanced material science, photonics and electronics, biotech and quantum computing. It typically refers to a new category of start-ups built on tangible scientific discoveries, which have the ability to disrupt markets. DeepTech companies can render existing products uncompetitive, change established industries for the better and lay a platform for innovation.

Its potential reach is significant, as DeepTech typically touches and overlaps a broad gamut of sectors. Successful DeepTech companies combine the unique and diverse skill sets of scientists, engineers and entrepreneurs to tackle some of the world’s most vexing problems, such as climate change, food production and chronic diseases, with companies implementing their pioneering vision to address such issues.

According to Boston Consulting Group, DeepTech ventures are characterised by four main

attributes. First, they are problem-oriented, not technology-driven. Second, they situate themselves, instead, at the convergence of technologies. Third, building on the advancements stemming from the digital revolution, DeepTech has shifted innovation away from the digital world toward the physical, developing mainly physical products, rather than software. Finally, DeepTech ventures rely on a deeply interconnected ecosystem of actors, without which they cannot thrive.

Given their lofty ambitions, it is unsurprising that establishing a DeepTech company requires significant time and financial investment, though the rewards can be great. DeepTech companies face a number of challenges in getting off the ground and require a robust ecosystem of support, including early-stage financing and dedicated toolkits to help them through their long and complex journey to market.

Investor interest

DeepTech is increasingly attractive to investors. Disclosed funding amounts in the DeepTech space increased from about $15bn in 2016 to more than $60bn in 2020, according to Boston Consulting Group.

According to Startup Genome, investment in the AI and machine learning subsector of DeepTech increased by 277 percent from 2012 to 2021. As a proportion of total capital invested in DeepTech overall, this subsector grew from 7.8 percent to 29.5 percent. Much of this growth can be attributed to more start-ups including AI in their technology stack, and to investors paying more attention to this subsector.

In the UK, investment in DeepTech companies rose 291 percent over five years to reach £2.3bn in 2020, according to Harrington Starr. The number of deals increased by 78 percent to 440 in the same period. This growth in the number of deals was higher than in the US and the rest of Europe, which saw 66 and 73 percent growth respectively – albeit the combined value of investments in the UK is less than these markets.

The average UK DeepTech company raises £24m after six rounds of funding, compared to £113m in the US. Even after accounting for the size difference between the two economies, US DeepTech companies receive almost twice the level of investment than those in the UK. Between 2018 and 2020, UK DeepTech companies received investment equivalent to 0.09 percent of UK GDP, while US DeepTech companies received investment equivalent to 0.16 percent of US GDP.

Traditionally, DeepTech enterprises usually only attract financing from venture capital investors or similar – those more comfortable with higher risk capital deployments and long-term horizons. Conservative investors that prefer stable, de-risked markets and liquid, tradeable, bankable and exitable assets, have been inclined to look elsewhere.

The glut of DeepTech companies which have sprung up since the outbreak of the coronavirus (COVID-19) pandemic also makes it harder to choose which ones to back. Investors will need to do their homework to assess which enterprises are developing viable technology that is most likely to succeed, to yield viable returns, and to realise its promise in a reasonable timeframe.

Improving the model

Despite growth in funding levels, DeepTech does suffer from a capital gap, with insufficient and imbalanced investment that is unevenly distributed across sectors. Reports suggest that ventures in artificial intelligence and synthetic biology collected two thirds of total DeepTech investment in 2020, leaving only one third to all the other start-ups in the field.

If the industry is to move toward an investment model that suits a broader range of DeepTech start-ups, change is required. Boston Consulting Group suggests investors should start by adopting a new approach of leveraging DeepTech knowledge and its ecosystem, anchoring problem-orientation and reshaping the distribution of returns. Then, they should embrace new investment models, such as adapted financing tools, possibly with longer timelines and new investment structures. Lastly, they should focus on the impact that DeepTech ventures can have on society – particularly when issues such as a climate and societal change are of burgeoning importance globally – and capitalise on those opportunities.

Revolutionary

The possibilities associated with DeepTech are seemingly endless. The rise of the sector could be analogous to the development of the internet, laying the foundation for game-changing innovation, boosting growth, and providing economically sustainable solutions to some of the world’s biggest problems. In the years ahead, we can expect more investor interest and activity to coincide with revolutionary new technologies, such as further breakthroughs in quantum computing.

As other markets become overheated and overcrowded, more investors will turn to DeepTech start-ups. The prospects for the sector look promising.

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BY

Richard Summerfield