Do you have to be an idealist to invest in deep-tech start-ups?
You might think so. Putting your money in deep tech is a surefire way to have a positive impact on society. By supporting deep-tech ventures, you pave the way for fundamental scientific and technological breakthroughs to address some of humanity’s biggest challenges in domains like energy, health, and AI compute.
Take a look at these examples:
- INBRAIN Neuroelectronics aims to advance brain-computer interface therapeutics by developing graphene-based neural technologies
- SOLiTHOR spearheads the development, manufacturing and commercialization of safe, clean and environemtally-friendly solid-state lithium (Li) battery cell technology
But there’s another reason why some suspect that deep-tech investors are driven by other considerations than material gains. It’s that those gains are supposed to be moderate at best, and highly uncertain.
The received wisdom is that deep-tech start-ups need monstrous amounts of capital while giving back only moderate – if any – financial returns. But like so many received wisdoms, this one has been refuted by facts. While deep-tech investors continue to deserve our applause, it’s not because they’re selflessly donating their money to a worthy cause.
Deep-tech investors deserve our applause. But not because they’re selflessly donating their money to a worthy cause.
The surprising facts about deep-tech venturing
Recent data from McKinsey and BCG shows that:
- Investments in deep tech yield higher returns than those in traditional tech.
- The failure rates of deep-tech start-ups are similar to those of traditional tech start-ups.
Both points are at odds with most people’s intuition. So, let’s look at them one by one.
Higher returns
It’s well-known that deep-tech ventures require more capital than traditional tech start-ups. After all, deep tech involves the development of new hardware. And that’s typically orders of magnitude more expensive than, for instance, a new software application. How is such a mountain of cash to be regained with a sizeable profit?
Deep-tech start-up Vertical Compute develops a novel vertical integrated memory and compute technology, unlocking a new generation of AI applications. It leverages a new way to store bits in a high-aspect-ratio vertical structure, a fundamental hardware innovation hatched in imec’s cleanrooms.
There are three factors that push up the profitability of deep-tech investments:
- In general, deep-tech start-ups require a lot of capital in their early stages. That’s when they need access to infrastructure and technology. But as they mature, their need for funding falls below that of traditional tech start-ups. Why? Because they don’t have to burn through their money to create a market for their product or to prove their unique position in existing markets. Deep tech is disruptive: if the solution addresses the right problem and works, it creates a new market.
- A deep-tech solution not only enjoys a guaranteed market, but also very limited competition. That means there’s no downward pressure on pricing, making profit margins higher. Since 2003, deep-tech investments have outperformed those in traditional tech sectors, with a net annual average internal rate of return (IRR) of 16 versus10 percent.
- Even when a deep-tech start-up doesn’t make it, there’s often some money to be made because of patents that were created in the earlier stages.
Equal risk
The second point will come as a particular surprise to many because, sadly, the early toppling of a deep-tech start-up is a common headline. It therefore makes sense that investing in deep tech is particularly risky, right?
The reality is a lot more nuanced. For one thing, this elevated risk is in large part perception: because the founding of a deep-tech venture is often greeted with particular excitement, its demise is also more likely to make the news.
In reality the early failure rate of deep-tech start-ups is only slightly higher than that of traditional tech start-ups. More importantly, deep-tech start-ups have a lower chance of failing during their later stages. Does the technology correctly address a market need? Then, once it’s proven, that market is almost guaranteed and competition is scarce. There’s little that can trip up a late-stage deep-tech venture.
There’s little that can trip up a late-stage deep-tech venture.
On balance, deep-tech and traditional tech start-ups have similar cumulative graduation rates of about 2.5%.
Mitigate early risks to maximize eventual returns
Funding deep tech is clearly a sound financial decision. However, it remains a speculative investment: high risks for high rewards. To increase your chance of a profit, you should make sure the risks are properly managed, particularly during the early stages of the venture.
Those risks fall into two categories:
- market risks – Does the proposed technology properly address an existing need, is there the possibility of creating valuable IP?
- technology risks – Does the technology actually work and is it commercially manufacturable?
Both types of risks differ significantly from those in the space of traditional tech venturing. That means they also deserve a dedicated approach. At imec.DeepTechVentures, we:
- Leverage the technical expertise of imec, the world’s leading semiconductor R&D hub. We offer access to deep-tech innovations and technologies that are de-risked internally, considerably alleviating one of the biggest worries surrounding deep-tech start-ups.
- Tap into an unparalleled deep-tech ecosystem. Imec is connected to an international network of universities, research institutions, industry partners and VCs. Through this network, we help start-ups to efficiently deal with market risks, e.g. by early validation of the product-market fit. And we complement the teams of our start-ups with entrepreneurs with the right business experience, enabling fast growth.
- Swiftly escort groundbreaking technologies from lab to fab. Imec’s R&D cleanrooms are equipped with the tools and processes that are standard in industrial manufacturing. The imec team has developed knowhow and expertise to define a path to manufacturing for emerging technologies. This is the ideal environment for ensuring the commercial manufacturability of a novel device, and to do it very early in the development process.
Podcast: How imec advances start-up innovation with Imec.DeepTechVentures
Through imec.DeepTechVentures, imec ensures that fundamental scientific and technological breakthroughs find their way to the market – allowing inventors and investors to make a positive impact on society, disrupt markets and make money.
Want to discuss your contribution to deep-tech venturing? Click the contact button below to schedule a meeting with our team.
