‘Tech’ is a misleading term. It suggests that tech startups compete based on the specific technology they research and develop — those “proprietary algorithms” and all that.
In reality, many startups succeed at the early stage using technology that is subpar and/or non-differentiated: open source libraries, web services in the cloud, and others. What makes the difference between failure and success is primarily the ability to build a product that people want and then to excel at marketing and selling that product.
The relative unimportance of technology doesn’t come as a surprise to practitioners of ‘tech’ investing. “At any point in time, there is more technology available than anyone knows what to do with,” wrote veteran VC Bill Janeway.
Coming up with new technology in the research lab is not, in and of itself, a decisive contributor to a startup’s success. In fact, investing too much in cutting-edge technology upfront can even be detrimental to building a successful business: founders are then focused on the tech rather than the business, and the company needs too much capital before even meeting its first customer.
At any point in time, there is more technology available than anyone knows what to do with.
Sadly, this message still hasn’t been heard in some European circles. Too often, European founders and investors express resignation in the face of the disappointing performance of local tech companies when compared to their counterparts in the US or Asia. And they come to the conclusion that because European startups have a harder time scaling up (because of the continent’s characteristic market fragmentation), local founders should instead focus on ‘deeptech’ challenges.
The answer is (not) deeptech
According to these ‘deeptech’ proponents, one approach for Europe could be to develop new technological assets that will then be sold to foreign acquirers before even hitting the market. This essentially follows the model that dominates in biotech, whereby you develop a new drug in a lab and then sell it to a big pharmaceutical company that deals with regulatory approval, marketing and sales. Another approach would be to focus on R&D challenges at the frontier so as to prepare for the next technological revolution. Alas there’s a high probability that this revolution won’t come along for another several decades yet, since we’re far from having harvested all we can from the current one.
This interest in ‘deeptech’ has been renewed by the rising concern over global threats such as climate change and the Covid-19 pandemic. New funds are being raised with a focus on startups that try and tackle these challenges with cutting-edge technology. A growing number of founders are becoming sensitive to the ‘deeptech’ narrative, focusing on R&D rather than the specific challenges that really do explain why Europe is still lagging behind at scaling up successful tech companies. And policymakers are succumbing to a fascination with the wrong indicators, such as the proportion of GDP allocated to basic research, the number of PhD students in European universities, or the (ill-designed) R&D tax credit that has become such a central part of our governments’ efforts at supporting ‘tech’ startups.
But cutting-edge tech won’t cut it. Instead, as wrote VC Jerry Neumann in a thoughtful essay published this month, uncertainty is what we should be looking out for. He posits that uncertainty, not new technology, is a key factor in lifting up tech startups.
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A startup’s competitive advantage... is not that it’s better at developing new technology.
A startup’s competitive advantage, according to Neumann, is not that it’s better at developing new technology. Even in the presence of a breakthrough on that front, it’s actually difficult to protect the related intellectual property once incumbents realise the technology’s potential and start developing it themselves.
Rather, a startup’s advantage, in Neumann’s view, is its unique ability to position itself in an uncertain context. “Incumbents strongly dislike uncertainty so they wait for it to be mitigated,” he writes, “but startups can build moats in new markets while they are still uncertain where they usually can’t with new technologies”. In other words, a startup has a shot at becoming successful if it manages to make its business defensible while the market is still full of widespread uncertainty. On the other hand, a startup focusing on developing a new technology will soon attract the attention of incumbents before it can even start positioning itself and building a defensible business.
The resulting lesson is clear: founders, including in Europe, should look for new markets ridden with uncertainty and use available technology to conquer them. It’s a much more hazardous path, on the other hand, to start developing new technologies about which uncertainty will soon dissipate, pitting the small upstart ‘deeptech’ venture against powerful, better-funded incumbents.
Does it mean that European tech’s interest in tackling wicked problems such as climate change is misplaced? Far from it — but what matters are the questions founders and investors ask themselves at the beginning. What they should look for isn’t some new fancy technology that will solve a problem such as carbon storage, smart grid balancing or longer battery life. Rather, they should focus on discovering new, untapped markets (think: micromobility, ride sharing, remote work, urban farming) where growth could give birth to new, climate-friendlier usages in production and consumption.
All in all, there’s more uncertainty on that front than on the technological one, which means that there are more opportunities for highly successful new ventures. So make sure to put your startup on the right path, focused on the right thing: delivering a product that people want today.