Unlocking deep tech’s revolutionary potential
Over the last two years, it has become ever clearer that what we call deep tech will have an outsized role to play in overcoming some of the global challenges we face. But if the world-changing potential of deep tech is going to be unlocked, we need a new strategy to guide the evolution of businesses in the space.
Earlier this month, on a grey Monday morning, we set out to do something different. In the House of Lords, along with the Office for Investment – the government unit responsible for facilitating high-value investment in the UK – we convened a group of key stakeholders to explore how a systematic approach to investment and support stands to overcome some of the key challenges that currently stand between deep tech companies and growth..
If deep tech businesses are going to live up to their paradigm-shifting potential, we – as investors, policymakers, educators, researchers and founders – need to reappraise the current funding paradigm ourselves. With guests including Sir Patrick Vallance, the Government Chief Scientific Adviser, Professor Mary Ryan, Vice-Provost of Research and Enterprise at Imperial College London, Dr Peter Bance, founder and CEO of Origami Energy, and Dr Antonio Avitabile, Managing Director Europe for Sony Venture Corporation, we asked how government, investors and universities can work together to support the founders with ideas that will shape tomorrow.
In this blog, I’d like to unpack some of the key themes that emerged, and reflect on the outlines of a new roadmap towards the deep tech revolution.
The session kicked off with a few words from Sir Patrick Vallance. As the Government Chief Scientific Adviser, he spoke with authority when he highlighted what must surely be the most significant achievement in the field of deep tech in recent years: the lightning-fast development of the revolutionary MRNA vaccine during the first year of the coronavirus pandemic. The UK’s deep tech start up scene, he said, punches above its weight. The UK has produced more unicorns than any other country in Europe, even as UK spin-outs’ US counterparts enjoy as much as 10x more scaleup funding1.
If there’s one thing everyone agreed on, it’s that the UK is a science superpower. Why? Thanks, in no small part, to our world-leading higher education institutions. Professor Mary Ryan highlighted some incredible statistics: four of the UK’s universities appear in the Global Top Ten QS Ranking. Our research base accounted for 13.4% of the world total of highly cited publications2. The potential for this phenomenal success in research to translate into enterprising business has been proven: between 2020 and 2021, enterprises spun out of Russell Group universities created 33,000 jobs – and brought £4.9bn investment into the UK2.
When it comes to deep tech innovation, the UK is a truly global competitor.
A key issue is culture. Historically, UK researchers have placed greater emphasis on academic impact than commercial impact, which has led to a misalignment in priorities between universities, academic founders and the venture capital (VC) community. Mindsets are changing quickly, but there’s more work to do.
Deep tech companies are, unavoidably, capital heavy, and they typically face significant regulatory obstacles. The government has a part to play in facilitating the translation of research, from policy support through enabling regulation, to the availability of funding for R&D. Regulatory agility and greater certainty go a long way towards unlocking funding – an essential step for founders with the potential to boost the UK’s international competitiveness.
As Peter Bance told us, the process of fundraising at a pre-seed stage is attritional. World-changing ideas are hampered by a fragmentary funding model that sees small amounts of capital drip-fed into companies whose potential profitability is huge – but will take years to realise. If the UK is going to be the global player its research base supports, founders need the funding technology validation requires. In deep tech, fundraising becomes a distraction from the serious work of building world-changing technology – and if innovators can’t get the capital they need here, they’ll go to a territory where they can.
Invest in atoms, not in bits
The government has a role to play in making things easier for pioneering founders, but as Dr Antonio Avitabile, Managing Director Europe for Sony Venture Corporation explained, institutional investors need to start thinking differently.
He said that over the past decade, funding in the UK and Europe has skewed heavily towards fintech and B2B Software. This isn’t just a European issue – it’s true in the US and Asia Pacific as well. A simple portfolio sector breakdown of most major funds is enough to illustrate the software’s dominance.
But as he pointed out, the major challenges of today, let alone tomorrow, won’t be solved with software. While innovations in deep tech represent a very real chance to mitigate or solve existential threats, from climate change to food security, software investment has become a kind of comfort zone for the VC community because of its track record of generating good returns.
But the incremental improvements software offers aren’t aligned with the demands of today’s world. Deep tech’s IP-rich hardware, underpinned with years of pioneering research, is – and it’s time for investors to break out of their comfort zones and start lending their support where it will count the most.
Learn what good looks like and extend horizons
Of course, not least amongst the many challenges of supporting the deep tech ecosystem is its complexity. Deep tech is, by definition, hard, cutting-edge science. For institutional investors without a sophisticated level of expertise, recognising ‘good’ isn’t always easy.
At Octopus Ventures, our deep tech investment team combines academic expertise from across a range of backgrounds, the better to fulfil VC’s purpose: to identify, and validate, future-shaping technology. It’s the responsibility of the VC community to lend support to pioneering founders and their solutions, to raise a flag of confidence over their businesses, and in doing so to help them raise a meaningful funding round – so they can get on with the important work of bringing their transformative solution to market.
As we moved into questions, it was clear that deep tech’s unique need for patient capital (long term investing; forgoing immediate returns in anticipation for more substantial returns in the long term) had emerged as a common theme. One guest asked how this requirement plays into the current VC model, which requires returns in a relatively short time frame?
The answer: it doesn’t. Instead, a multilateral solution is required. Whether it’s changing regulation around the use of pension funds, or making more grant money available to founders for whom risk capital is not yet appropriate, the government has a part to play. And VC? It’s our job to be realistic about what a deep tech journey looks like. The average three-to-five-year holding period we might expect from a late-growth B2B software company doesn’t apply here. But change is never singular, and while it can be uncomfortable, it’s often positive. Deep tech has the power to change the world – and the rewards justify our industry changing to accommodate its needs.
There’s no single reason that now is the time to get together, and start talking seriously – and strategically – about the future of deep tech – there are many. Our meeting concluded at 10.15am sharp, not with any hard conclusions but with an almost-tangible air of excitement. It was just the first (future planning for the next is already underway) and the conversation was well and truly started.
Deep tech will change the world, and as a scientific superpower the UK will have a huge part to play.