Risks and Rewards of Investing in Deep Tech

Risks and Rewards of Investing in Deep Tech
Photo by Alex Knight / Unsplash

Some investors joke that no matter how cool the technology is, $1 earned in a Deep Tech startup costs the same as $1 earned in any other startup, regardless of the "depth" of the technology. However, Deep Tech is indeed "Deep," so investors rightfully expect a "1+" dollar return. And this "plus" can be very substantial...

Deep technologies are changing the world – no exaggeration. Just like the internet once did. The potential is enormous: Tesla, SpaceX, the synthetic biology revolution, flying taxis, the COVID vaccine developed in nine months using a new mRNA vaccine approach, artificial intelligence...

All of them are driven by the depth of technology and they share four common features:

  • They are problem-oriented, aiming to solve significant and fundamental societal challenges. 97% of Deep Tech innovations contribute to achieving at least one of the United Nations' Sustainable Development Goals.
  • They utilize the best existing or entirely new revolutionary technologies to address the problem. That includes cutting-edge materials, synthetic biology, artificial intelligence, and quantum technologies. 96% of Deep Tech companies use multiple advanced technologies simultaneously, enabling them to generate excellent intellectual property.
  • They have transitioned from digital innovations based on bits to digital and physical innovations based on bits and atoms. Approximately 83% of Deep Tech companies design and create physical products. Their digital skills focus on using artificial intelligence, machine learning, and advanced computing to explore advanced possibilities in physics, chemistry, and biology.
  • They possess a complex inter-organizational ecosystem for investment, support, fundamental research, and product development. Due to the complexity and large scale of these innovations, as well as the Deep scientific foundation required for their realization, they often involve significant institutions and sources of funding from the very beginning. It is virtually impossible for two entrepreneurs who completed a business college "in a garage" to independently come up with a substantial Deep technological product. Typically, the process involves entire research institutes, universities, and scientific laboratories.

Investing in Deep Tech is a highly-risky and peculiar endeavor. It goes beyond merely funding new technologies; it involves supporting "Deep" research, knowledge, and discoveries that form the foundation for creating revolutionary products, processes, or solutions.

What are the risks for Deep Tech investors?

First, investors must understand that Deep Tech is considered a niche investment, and its development is highly inconsistent. The investment landscape for Deep Tech is geographically concentrated, with many promising initiatives in the US, China, and partially in Europe, while the rest of the world remains significantly underfunded.

The most significant risk in Deep Tech investing is of technical nature. Innovations often rely on new developments, pioneering ideas, and scientific breakthroughs. It can take years before the invested funds materialize into a product ready to leave the laboratory and be presented to the wider public. There is also a risk that the technology or a product may not function as intended or be suitable for commercial applications.

Bringing a product to market can be lengthy, as it requires convincing the market of the technology's efficiency and safety, not only developing it. New technologies and products rarely transition from the "under development" to a "ready" stage in one step. Investors need to possess resilience and a long-term vision.

Significant additional funding may be required for research and testing during the early stages of developing Deep-Tech solutions. Unexpected opportunities, problems, or product characteristics not considered during the initial product design may arise. Investors must prepare to support the company over a prolonged period without immediate returns.

A Deep understanding of the technical intricacies and potential of the new technology is critical for Deep Tech investors. That demands high qualifications and the ability to work with scientists, engineers, and other specialists. If you lack the relevant knowledge, it can pose a significant risk for you as an investor.

Some risks may also be associated with intellectual property protection. Patents and other forms of protection are crucial for Deep Tech startups to safeguard their innovations from competitors. Keep in mind that other startups or large corporations may develop similar solutions or use alternative technologies, which can diminish competitiveness. Moreover, lacking full ownership rights to your product's technology could potentially complicate the sale of the company in the future, as prospective buyers would seek to exercise control over the technology within the acquired entity.

It is also worth considering the risks from a legislative perspective: some sectors of Deep Tech, especially biotechnology and medicine, may be heavily regulated. Investors must be aware of these specificities and consider them when making decisions.

Also, regard the risk of dependency on key individuals, such as founding scientists or essential developers. Losing such a crucial person can seriously hinder the company's development and project implementation. Ensure talent retention within the team while avoiding relying solely on one key player. Distribute responsibilities and efforts evenly within the group to mitigate risks.

New technologies can often lead to unforeseen consequences or problems that only become apparent after their implementation. Therefore, be prepared for quick adaptation and rapid expansion of the application areas of your product. Some Deep Tech innovations will offer a wide range of applications, each of which can drive the business in vastly different directions. Take, for example, image analysis using artificial intelligence, which can detect numerous issues, from identifying cancer in pathology to detecting theft at self-checkout counters. Therefore, during the development stage, consider all potential directions for the future application of your product to avoid a chaotic and incomplete approach.

As we can see, there are numerous risks for investors in Deep Tech. So why does this startup field attract significant capital?

Benefits for Deep Tech Investors

Large Growth Potential. These companies can have tremendous growth potential since they offer fundamentally new solutions to global problems or create totally new markets. Biotechnologies (gene editing, new drugs, etc.), quantum technologies (quantum computing, cryptography), new materials with unique properties (such as graphene), AI and machine learning (especially those involving Deep neural networks), space technologies (private space sector and cutting-edge solutions for space exploration) – aren't these colossal untapped fields for growth?

And new markets mean high revenue potential: Deep Tech can create market breakthroughs and transform industries, allowing investors to gain high returns. Also, investing in Deep Tech at the early stages of company development can lead to significant ownership in unique startups.

Investing in Deep Tech helps investors become leaders in new, innovative technological sectors and become less dependent on traditional markets.

Advanced Position in technological trends. Investors who fund cutting-edge technologies can seize the first opportunities to exploit technological trends that are just beginning to gain popularity.

For Deep Tech investors, there is also the option of strategic partnerships with other players in the field, including large corporations, universities, or research institutions. Additionally, investors in Deep Tech often gain access to top-notch professionals, world-class researchers, engineers, developers, and geniuses.

At times Deep Tech investors may feel like gods, finding solutions to global challenges and addressing specific human problems. Climate change, saving lives and human health, international security, preserving natural resources, and more are among them. Many Deep technologies work on solutions for environmental issues, such as water purification, renewable energy sources, or more efficient resource utilization. Investing in these technologies can have both commercial and environmental benefits.

And finally, we advise you to consider the four moments of truth outlined in the fundamental report “Deep Tech: The Great Wave of Innovation” by BCG and Hello Tomorrow’s, which every investor looking to invest in Deep Tech should rely on:

The Copernicus Moment: on how to frame the paradigm. In other words, what is the problem, and could reality be different?

The Copernicus Moment refers to framing the right question and identifying the right problem or business friction to derive a suitable approach. It is about generating the right hypothesis by using the imagination: seeing things not for what they are but for what they could be.

The Newton Moment: on forging the theory, i.e., how can we make this possible?

The Newton Moment lies at the core of the Deep Tech approach. It is when science and engineering meet to validate the hypothesis and when technologies converge to make things possible that were not possible before.

The Armstrong Moment: on taking the first step, i.e., can we build it today?

It's when the different technologies and the DBTL cycle are applied to produce the first working prototype very fast, and doing so de-risks the venture.

The Asimov Moment: on shifting reality, i.e., what does it take to become the new normal?

The Asimov Moment is built, from the very beginning, around economics and business requirements. This is achieved by following a design-to-cost approach by defining the value strategy and target costs to establish oneself in the market.

Deep Tech is undoubtedly an exciting and dynamic sector with a profound impact on the present and future of humanity. It is risky but also grandiose! For those not ready to make investment decisions independently in this field, consider collaborating with venture funds or specialized investment platforms focused on Deep tech. Stay in the trend, be attentive to innovations, and invest wisely!