Investing in deep tech startups requires a different playbook due to its nascent systems and complexity

Autonomous driving vehicles, brain-sensing headbands that can translate your thoughts into commands, and rockets that could take you to Mars and back: these head-spinning technological wonders that are currently being developed in advanced tech ecosystems like the US fall under the label of deep tech, a term used to describe revolutionary technology that will have a profound impact on humankind.

Many deep tech products are still in their conceptual and prototypical phase, and are still years away from viable commercialisation. And because they comprise layers of hitherto unseen algorithms and mechanics, investors often find it difficult to fund such nascent companies as they do not have the expertise and knowledge to analyse the potential value of such a technology — especially when there is lack of similar precedent products or competitors to compare to.

In a panel discussion at Singapore Week of Innovation and TeCHnology (SWITCH) 2018, a group of VCs and a deep tech startup took to the stage to discuss the multiplex of deep tech investments and how deep tech startups and VCs can form strategic partnership.

The panel was moderated by Arun Nayak, Associate Director, Mergers & Acquisitions (Technology, Media & Telecommunications), EY Corporate Finance, and the panellists consisted of the following:

1. Dr Basil Lui, SVP (Investments), EDBI

2. Liu Genping, Partner, Vertex Ventures

3. Paul Santos, Managing Partner, Wavemaker Partners

4. Doug Parker, COO, nuTonomy

5. Vishal Harnal, General Partner, 500Startups

Here are some salient takeaways from the session:

Difference between investing in a deep tech startup and a ‘conventional’ startup

Deep tech startups may seem less approachable and may generate less interest than a typical tech company — an e-commerce platform, for example — but they have a strong technological barrier to entry; and as such, many have patented or defensible technology. With less competitors in the space, they may be able to command a high market share should they succeed — and that should endear them to the right investors.

But investors have to ask themselves a fundamental question: whether they have the expertise to access the technology or the engineering team of the company. Those who lack the capabilities should tap into different networks across the globe, and check if there is a partner who has a competent understanding of that startup’s specific industry and can thus perform the necessary due diligence.

Investors pump money into startups early with hopes that they will become valuable in the future. As with any tech investment, investors have to learn to be patient before they can expect returns. And there are several indicators for growth.

For example, with an e-commerce company, investors have to look at metrics like unit economics. The company may be generating high GMV sales but its revenue may be only a small percentage of that. But investors fund the company with the belief it will be able to scale their revenue and hit a sustainable run-rate.

For deep tech companies, they have no revenue or GMV sales projections. So investors have to look at the company’s proof-of-concept contracts or whether the team can grow its tech. And because there aren’t usually many other companies developing the same deep tech, the rewards for the investors would be significant if their investee succeeds.

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For deep tech startups trying to raise funding, it is an uphill climb. Since many conventional tech funds may not full appreciate the applications deep tech, it will be wise to gather a pipeline of deep tech-focused funds globally early on (for example in markets where there is stronger deep tech development). Deep tech entrepreneurs should try to engage these funds early on so the investors can spend time to study the tech and addressable market in detail, instead of only waiting until they need the cashflow.

Deep tech entrepreneurs should also take every opportunity to speak at conferences or other industry events to get the word out. For self-driving startup nuTonomy, the founders met their investors at such events. But it still took a lot of explanation and patience before the company was able to secure funding. COO of nuTonomy, Doug Parker, said that founders raising money in deep tech should be allowed twice as long the time it takes to clinch funding because understanding the tech may take a long time.

Building a deep tech company

Beyond investment, deep tech startups also have other factors to consider. One of them being talent. In the context of Singapore, the country has become an attractive hub for corporate R&D and PhD research students, so there’s no shortage of deep tech talent.

The issue is, many of them may be more comfortable working in research institutions as opposed to startups. Startups or government-backed innovation bodies need to attract more entrepreneurial deep-tech talent from international markets as well as find ways to encourage these untapped homegrown talent to build businesses.

By leveraging Singapore’s deep tech talent and resources, deep tech entrepreneurs can secure LOIs (Letter-of-Intent) or commercial trials early in the game. This, in turn, gives them a bit leeway to put off raising their seed round.

To maintain a competitive edge, deep tech entrepreneurs need to patent their inventions quickly. Sharing information can be beneficial for the tech community but giving away too much may lead to competitors reverse-engineering their ideas, and thus it would not bode well for their business — sometimes it’s better to keep an idea a trade secret.

However, it is also too costly to maintain the entire portfolio of patents, so deep tech entrepreneurs should focus on the core ones that make up the fundamentals of their business.

The path to commercialisation is difficult for deep tech startups. But if the entrepreneur can identify a specific problem in a specific industry to solve instead of a broad, generic one, the pathway to success becomes much shorter.
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