Deeptech/Opinion/

Do we really need ‘deeptech’?

Policymakers, VCs and founders in Europe seem to have decided that we need deeptech. We don't — or at least, not for the reasons they think.

Nicolas Colin

By Nicolas Colin

‘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.

Enter uncertainty

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.

“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.

Nicolas Colin works for investor The Family. He writes a regular column for Sifted.

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Benjamin Britton
Benjamin Britton

When it comes to software this may be true but at least when it comes to hardware, this is a poor take on deeptech, which as another commenter had it, does not develop so much as commercialize already developed technology. The net present value of ‘hardware’ energy/climate-related deeptech to society is literally in the tens of trillions of Euros, i.e. the differential between 1.5 °C and 2+ °C targets. The problem lies in a mismatch of under-funding or mis-funding deeptech in all nations except the US and China (obviously there can be errors of over-funding but under-resourcing is the normative… Read more »

Lamin Ben Hamdane
Lamin Ben Hamdane

I define deep tech startups as companies that commercialize years of previous research of universities/reasearch centers. These startups address the uncertainty of where the technology creates most value and find the best use case/application for it. The expectation is that a first product is ready in 2-5 years. As Europe has high quality research, I think it makes sense to foster deep tech startups. Doing this doesn´t mean that many other startups shouldn´t build their product on existing tech. Most of the biggest tech titans like Apple or amazon just built their products & services by combining intelligently what already… Read more »

Martin Kupp
Martin Kupp

I feel like the article is building a wrong trade-off. While this dichotomy (technology vs market) is right to raise a lot of attention, it is not a good guide for founders in my opinion. As you mention yourself, it is uncertainty that matters for entrepreneurship. And here I fully agree. Entrepreneurs are best equipped to tackle uncertainty. There is a whole research stream looking at entrepreneurs as uncertainty experts, using effectual decision logics to deal with this uncertainty which is in most cases fundamentally different from a causal decision logic used in established companies. But uncertainty can come both… Read more »

Paul Dowling
Paul Dowling

As usual VCs speaking nonsense to support their own thesis. The low hanging fruit of the consumer internet have largely been picked. This has resulted in deeptech solutions being used to solve ‘real’ challenges facing society. Much of this tech comes out of universities and VCs need to learn to get comfortable with it. It is deeptech that is discovering new vaccines, monitoring climate change and even behind consumer products such as Alexa and iPhone. The article is right to say that there is still a category of low tech applications using lean methodologies. This is clearly what the author… Read more »

Octavio Herrera
Octavio Herrera

Pretty much the same could be said from people defending deep tech as the focus Europe should have: European entrepreneurs, investors and politicians speak nonsense to support their own thesis, there is a lot of opportunity in consumer internet technology, just because there are giants like Google and others doesn’t mean all the opportunities are gone and for sure low hanging fruits isn’t the focus there: most consumer technology have huge challenges comparable to finding vaccines or creating space technology. The real challenges need to be addressed for sure but that doesn’t make other things like finding better efficiencies in… Read more »