Will Tech Save Us?

Last week Capital Enterprise had a Startup Resilience panel on how Deep Tech is impacted by the COVID pandemic that we cheekily subtitled "Will Tech Save Us"?

Unlike some of the eminent panelist I shared the virtual stage with (Sarah El -Hanfy AI Lead at Innovate UK, Chris Haley Partner at 01 Ventures and Miriam Cha Co-Founder of Quantum Computer Software startup Rahko) I gave a somewhat rambling answers to the questions posed by our moderator and startups. This article is my second bite at trying to give some insights on what I believe is happening to Deep Tech startups in the UK and why the government and the eco-system that supports them ( including us at Capital Enterprise) needs to up our game. I also want to say that Deep Tech Startups are super hard to make succeed. Rewarding but super, super hard. Although there is some evidence from the decks of fundraising startups coming our way that "Covid is the new AI" ( an unworthy attempt by some startups to impress VC's with their relevance to today's pressing societal need) no one should "pivot" into attempting to become a deep tech startup if they do not have the team or understanding to pull it off.

Firstly lets start at defining what is a Deep Tech startup and why they differ from those who use or adapt proven technology to bring to market some business model innovation or improved user experience.

The simple definition of deep tech startups is that they involve teams of "Venture Scientists" developing and then commercialising Engineering/ Scientific breakthroughs that not only solve a big hairy audacious problem that is holding back an industry/customer ( even though they might not realise that at the time) but show the way to solve other associate problems for anyone who is paying attention. To unpack this statement it may be best to use the Tech Readiness Level model used by the UK government and those a round the world to emphasise that Deep Tech Startups:

1. Need a new type of founder. Founders that are both world class scientists/engineers and entrepreneurs. My colleagues at Conception X coined the phrase "Venture Scientists" to describe founders ( often PhD students and graduates) willing to take through a potentially ground breaking technology through all the Technology Readiness Levels. Who else has both the ability and motivation to do so, who else can take on the risk and not only accept the inevitable set backs but learn from them and have the practical abilities to make amends. Universities like Kings, Imperial, UCL and Oxford increasingly have programmes and funds to support these emerging "Venture Scientists". Accelerators like Entrepreneur First and Conception X that infuse this specialist world class highly motivated "Venture Scientist" with entrepreneurial know how and insight from ex-founders and experts are now showing that there methods generate some of the best tech startups. For confirmation AI Seed sources the vast majority of our portfolio startups from universities and accelerators that support these "Venture Scientists" to build deep tech businesses based on the founders "foundational" research. AI Seed like many investors tends to invest in deep tech startups that are post TRL 4 or 5 thereby relying on the founders prior support to get them to that stage.
2. Takes time. Deep Tech startup have a much longer "gestation" period involving multiple steps over many years before the novel technology is ready for commercialisation. The time to market is usually counted in years and not months and the "issue of having to endure a long investment horizon before returns can be contemplated" means that finance needs to come from the most patient capital with the deepest pockets. This is usually government or conglomerates with lots of cash on the balance sheet and whose monopolistic or oligopolistic position ( like the FANGS) means they can invest for returns in the more distant future. In times of crisis such as wars or pandemics the immediate requirement for new technological solutions generates a rush by government and philanthropic agencies to green light and fund the full commercialisation of technologies deemed to be at the Tech Readiness Level level 5 or above. Most COVID competitions fall into this "wave" but others such as vaccines (especially for the class of Corona Viruses which to date there are no vaccines) do not. The length of the gestation time and multiple milestones a deep tech startup needs (especially in regulated markets like health or finance) means the commonest reason that deep tech startups fail is that they run out of money.
3. Super high levels of technical risk. At each stage of development there is a more than even chance that the innovation will fail to work and fail to generate the necessary commercial breakthrough. The ability to assess and calculate the risk of success or failure of these ventures and choose the most credible and viable deep tech startup is only possible from investors who are also highly technical. Most investors and funders can read a spreadsheet but few can "look under the hood" and assess the technical feasibility of a deep tech startups experiments. And experiments or a series of experiments is actually what a deep tech startup really is and when the success of these experiments are stochastic ( as is the case in vaccine development) an investor or financier in search of a return would be best advised to fund multiple deep tech startups/ projects, carrying out multiple experiments. This is even more so if in a shorten time frame, they need a solution that will work. So 1 find it surprising that the UK government is only presently investing (albeit millions) in only 2 UK Vaccine projects (at Oxford and Imperial), whilst spending billions on keeping industries like retails, hospitality and travel alive. I would say these industries would be better protected, more likely to get back to normal by increasing our odds of getting a vaccine for COVID 19. This can only be achieved by investing in 10's of experimenting vaccine hunters. By investing in more vaccine development teams and projects, the government would have a much greater chance of returning swathes of economy back to "normal" than spending billions on keeping industries like hospitality in semi-hibernation. The same also applies to investing in therapeutics.
4. Pay-off must be big and realisable. There is wrongheaded assumption that deep tech startups do not have to engage in intensive customer development to find out how potential markets and customers really behave and the big unmet needs that they have. The truth is the opposite. If you going to spend years and a lot of sweat, blood, tears and treasure on developing a deep tech startup, you better make sure that the solution matters to someone, matters big and can transform the world and the world of your customers, customer. A problem in search of a solution is often the accusation levelled at Deep tech startup and it is justified if the startup has not done their customer development homework. The onus is on the Deep Tech startup to keep on doing repeated customer development exercises through out their often long research and product development process to ensure the original mission and market insight still holds true. Deep Tech startups cannot easily iterate in market on the basis of a quick to build and quick to right off MVP, so they really do need to understand their market and customers inside out. Only this way can they be reassured that the pay off can be big whilst getting to know in detail how they can best commercialise the technology when it has been proven to work. It is a necessary condition for a deep tech startup that the technology works ( that the COVID therapeutic drug is a cure) but it is not sufficient that a great technology creates a great business.
5. Needs to capture the castle and defend it. There is a big difference between creating value through your breakthrough technology and capturing that value. Some of that capture will be in the creation and execution of repeatable and scalable business models. For instance innovations in areas such as value based pricing are increasingly popular ways for deep tech startups to prove value by removing the customer adoption friction caused by charging either a fixed or upfront fee. Value based pricing business models place the risk on to the startup to back the ability of their new product/ technology to create new, previously unseen, value for the customer first before then claiming for themselves a justifiable bigger share of the resulting commercial rewards. When the value is captured and the customer becomes dependent on your technology to generate value for your clients customers is when your customer will seriously investigates whether deep tech startup technology is hard to copy or is protected by a watertight patent. Traditionally the most effective moat/ defence for a deep tech startup has been IP protection but increasingly the real moats lie in the tacit knowledge held by the Deep Tech team that enables them consistently solve the hard engineering and scientific problems. This is certainly the case in AI/ Machine learning startups where the alongside lakes of proprietary data, the moat comes from the ability of the team to keep building and testing world beating categorisation and prediction models.
6. Vision - Founders need to have a compelling vision that not only motivates them and the "army" of employees and partners they will need to recruit (and in my experience a big mission to solve some of the big scientific, technological and societal challenges is a great recruiting call) but they also need that vision also needs to be recognised in its full commercial potential by investors and early adopting customers. This need for buy-in to the vision of the deep tech startup is why the early adopting clients of deep tech startups products tend to be other deep technology companies who can understand and see that vision. This recognition and understanding is also why the big USA and increasingly Chinese tech companies often become the acquirers of our UK deep tech startups usually before their commercial value and impact becomes apparent to the wider market. If I have one big hope for a positive outcome of the COVID 19 pandemic is that more of the mainstream non-tech world will start to see that partnering and investing in deep tech startups earlier in their journey is a must and not a nice to have. The COVID pandemic and the economic carnage it has created may get more corporations, investors and public institutions to see that the best way they can get ahead of the competition and survive future pandemics and economic shocks is through the long term efforts of deep tech ventures. I for one would be interested to see over the next few months whether private sector keep on asking governments to bail them out in a crisis or whether as an insurance policy they individually or in groups start backing deep tech ventures.

Founding or investing in deep tech startups is not like founding or investing in "tech enabled, if successful, pathway to platform startups", because fundamentally the technical risk that the product/ technology might not actually work is by far the most likely outcome. Experiments fail. That is one of their purpose, but are we resilient enough to accept this fact.

The COVID Pandemic I believe shows the need for innovation and the need for new ventures to bring those innovations to market. Given the low chances of success, the UK will need a lot more founders (and investors, government funded support, advisers, mentors, early adopting customers etc) to step up for us to get through and prosper beyond this crisis and others to come. The new initiatives from Innovate UK, UKRI, the fast tracking of R&D tax credit payments and the launch of the Future Fund are all fantastic UK Government initiatives but we will need more and we will need the private sector ( outside startups themselves) to step up. Because yes when it comes to the big challenges in the world, I do fundamentally believe that "Deep Tech Will Save Us".