The Hard Truth About Deep Tech
European Straits #124
Dear all,
This is the week of The Revolt of the Public! Martin Gurri, the author of the book, is in Paris and we’ll be hosting him tonight for an event that should resonate with current affairs—from Trump’s state visit to the UK and Theresa May’s resignation to the aftermath of the Gilets Jaunes crisis in France. Here’s where you can register: Fireside chat with Martin Gurri, author of The Revolt of The Public 🤗.
I’d also like to point out that Andreessen Horowitz's Scott Kupor’s Secrets of Sand Hill Road just came out. When I first considered entering the venture capital industry back in 2012, there were so few books that you could read to simply learn the history of the thing, what it was all about, and how exactly it worked.
The first book that I finally found, Bill Janeway’s Doing Capitalism in the Innovation Economy, was illuminating and became a work companion that I frequently go back to. But I was quite surprised that no handbook existed for anyone wanting to learn about venture capital and how it’s done today—not from a fundraising perspective, or a biographical one as in Bill’s case, but from an industry perspective.
It would seem that that problem has now been solved thanks to Scott’s book, which you can order here: Secrets of Sand Hill Road: Venture Capital and How to Get It. (I’ll confirm once I’ve finished reading 😊.)
10 ideas about deep tech
You’ve probably spotted a trend: There are more and more venture capitalists focused on deep tech. Some are part of the impact investing crowd. For those, deep tech is seen as the best way to break constraints preventing us from solving the world’s problems (I don’t necessarily agree). Others have simply identified deep tech as a rising asset class with promises of early (if not sizeable) returns.
In this context, it’s time we form a clearer idea as to what exactly deep tech is about. To this effect, let me share a few ideas.
1/ Technology is not synonymous with innovation. Rather it is best understood as an input for innovation. Entrepreneurs usually exploit a rather new technology to break a constraint, after which they usually go on to discovering a radically new business model. Thus in the world of computing and networks, what venture capitalists fund is not the technology itself. Rather it’s the technology-driven process of discovering a business model that’s repeatable and scalable—also known as a startup.
2/ Startups don’t need to bother with research & development. In the world of computing and networks, technology is cheap, abundant, and well understood. It’s already been paid for by others: the state allocating capital in the pursuit of a mission serving the common good (think: winning the Cold War); speculators then moving in to take part in the bonanza (think: the dotcom bubble); and large tech companies sharing their technology in the form of open source or cloud computing.
3/ Research & development matters, but only for large tech companies. Indeed it’s usually about tackling challenges at scale. Think about Facebook reinventing data centers to support the massive workload of billions of users interacting in real time, Google advancing research in self-driving cars as they’re furiously looking to expand on new markets, or Amazon breaking bottlenecks in its logistics supply chain. All in all, such R&D is paid for by corporate cash flows rather than by venture capital.
4/ There is another approach, however, which is that of VC firms in biotech. In this case, VC is effectively about funding technology—and taking the risk that the research process will never lead to discovering that new molecule. But VCs can afford to take that one risk because they don’t risk much on the business front. If a research team comes up with a drug that works, there will certainly be demand from patients, and it will all be paid for by insurance companies and social insurance regimes.
5/ And so here’s a key idea: Venture capitalists only take one risk at a time. In computing and networks (or “software”), they take the risk of an entrepreneur never discovering a scalable business model. In biotech, they take the risk of a researcher never coming up with a new drug that works. But you’ll never find a VC firm funding a venture that takes risks on both the technological and business fronts. If those exist, it’s usually because they’re atypical—or there’s been a misunderstanding.
6/ Deep tech is about helping software digest the world. Software alone can only go so far. Its eating the world requires advanced technological breakthroughs in certain industries. The car industry is more easily digested by software if vehicles are electric, and so you need R&D to come up with these electric vehicles. Likewise, healthcare is more easily digested if you can customize treatment for any patient, and so you need to come up with radically new ways of designing and implementing treatments.
7/ From a venture capital standpoint, deep tech is closer to biotech than to software. It’s about building a technological asset and then selling it to a larger organization that can use it in its business. It’s rarely about building a standalone business—again, you almost never take two different risks with the same company. That means two things: deep tech ventures are usually sold early; and the upside for investors is much more limited, because most of it will be realized later on by the buyer.
8/ From a policy standpoint, it makes sense to support deep tech only if it serves national champions. This is China’s strategy. Now that they’ve grown their own tech giants, they’re investing in deep tech up the stream (esp. semiconductors) so as to gain independence from foreign suppliers, secure the additional value added, and compound economic growth. Meanwhile, European governments invest in deep tech but Europe still has no tech giants of its own. It breeds technological assets, but not many thriving businesses.
9/ If a region (like Europe) doesn’t have tech champions down the stream, most of their deep tech investments will benefit others. This is a key insight that too many miss: the market for technology is now global, and large companies are scouting assets all around the world. Thus there is no reason to think that a deep tech investment in a given country will necessarily create long-term value in that country. It will only do so if the resulting asset is used by local players to tackle local problems.
10/ It’s no wonder why Silicon Valley is so passionate about the global deep tech effort. They have their sights set on specific problems in certain industries, and they know that they need breakthrough technologies so that software can more easily digest those. But they arguably prefer that other countries take the risks of carrying out R&D while large US tech companies reap the rewards once the new technology works. Only China is drifting away and insulating itself from that clustering effect.
I have written quite a lot on these topics (science, research, technology, innovation, and entrepreneurship). Here are some of my articles to go further (and an additional reading list below):
Low Risk, High Reward: Why Venture Capital Thrives in the Digital World (The Family Papers, November 2015)
From Lone Inventors to Corporate Labs to the Entrepreneurial Age (The Family Papers, April 2016)
French Engineers and Entrepreneurship: It’s Complicated (The Family Papers, April 2016)
A Brief History of the World (of Venture Capital) (The Family Papers, May 2016)
Startups Are Not About Innovation (Scaling Strategy by The Family, April 2017)
Startups Are Not About Technology (Scaling Strategy by The Family, April 2017)
(my weekly newsletter, November 2017)
Startups Don't Need Universities As Much As They Used To (Forbes, September 2018)
It Takes Missions, Not Solutions, To Solve Today's Problems (Forbes, October 2018)
The ‘Pas de Deux’ of the State and Venture Capital: On Doing Capitalism in the Innovation Economy by Bill Janeway (The Family, March 2019)
I usually include our latest articles here, but it’s true that we at The Family also put out tons of videos on our YouTube channel, Startupfood. Here are some recent ones I think you’ll enjoy:
🤓 My cofounder Oussama Ammar loves talking about learning and how it happens. His video “Learn to Learn” is a must for the Entrepreneurial Age.
📈 Nilan Peiris, VP of Growth at TransferWise, came to give a talk at our Berlin office on “5 Key Steps to a Growth Strategy That Works Immediately”—a topic that TransferWise knows well 😊
🚚 Jessica Oppetit, London GM of ViaVan, also dropped by Berlin to talk about how they convince giant companies in a legacy industry (in their case, transportation) to create mutually beneficial partnerships with a startup.
🎓 And one video that will be out soon, but that you can go see in person! Next Friday in our Paris office, we’ll be hosting Coursera CEO Jeff Maggioncalda. Get your tickets right here.
Here are more readings to reflect on deep tech and its contribution to economic growth:
The Secret History of Silicon Valley (Steve Blank, 2009)
Don't Expect Much From the R&D Tax Credit (Amar Bhidé, The Wall Street Journal, September 2010)
Google Engineers Explain Why They Stopped R&D in Renewable Energy (Steven Lacey, Green Tech Media, November 2014)
The Fall, Rise and Fall of Creative Destruction (Justin Fox, Bloomberg, January 2017)
Google doesn’t necessarily need innovation (Steve Yegge, Medium, January 2018)
Mission thinking: a problem-solving approach to fuel innovation-led growth (Mariana Mazzucato, IIPP, March 2018)
There’s No Good Alternative to Investing in R&D (Anne Marie Knott, Harvard Business Review, April 2018)
The IT revolution and the globalisation of R&D (Lee Branstetter, Britta Glennon, J. Bradford Jensen, Voxeu.org, August 2018)
Kai-fu Lee: No hope for Europe’s artificial intelligence sector (Carly Minsky, Sifted, December 2018)
Why China Will Rival the U.S. in High Tech (Dan Wang, Bloomberg, April 2019)
Warm regards (from Paris, France),
Nicolas
