Twenty one years ago, Andrea Traversone, managing partner at NATO Innovation Fund, invested in DNA sequencing startup Solexa. He didn’t have high expectations at first.
“Hermann Hauser, a hero of deeptech investing in Europe, sent me to do due diligence on a little company in a barn. I turned up and said is this a company or is it a farm? Roll forward and the founder is changing the world because of DNA sequencing. It was super successful from a returns point of view.”
But while LPs have pinpointed deeptech as the second most promising segment in venture, funds and universities can do more to accelerate sector growth.
It’s the “perfect storm” for deeptech, says Arne Morteani, founding partner at Kiko Ventures. “A lot of the ‘shallow tech’ businesses have become so easy that it's hard to scale them.”
So Sifted asked founders and investors for their recommendations on moving deeptech talent out of the lab.
This article was inspired by the event theme of Sifted Summit: new rules. We’ll be running a track dedicated to deeptech’s new rules — and discussing how to make tech transfer work, the implications of ‘Q-day’ and the rise of the infrastructure startup. Catch everyone interviewed for this piece at the event.
1/ Introduce commercial mentorship
Deeptech starts with a very technical vision, but lab experiments don’t always translate into market innovation.
“Science for the sake of science will not make you a billion dollar startup, it needs to be targeted,” says Carmen Palacios-Berraquero, CEO and cofounder of Nu Quantum, a quantum startup spun out of the University of Cambridge.
As commercial thinking might not come naturally to academic founders, good mentors and early hires in product, technology and business development can help founders develop a commercial proposition.
“You need to have the commercial and technological acumen in the same head,” says Morteani.
Universities can also do more to incentivise entrepreneurial thinking. Building a startup is a career risk for academics, taking time away from publishing journals and funding research.
One solution could be viewing researchers who build a deeptech startup as a academically successful, says Dr. Elisabeth Roider, partner and chief medical officer at Maximon, a venture builder specialising in longevity.
2/ Reduce risk perception for founders
Many European spinout successes have their roots in academia. University spinout programmes support academics who’ve filed for a patent to build a startup.
“In Cambridge, there's a set path you can follow, which reduces uncertainty,” notes Palacios-Berraquero. Cambridge is ranked as the most intensive science and technology cluster in the world by the Global Innovation Index and has spun out 178 startups.
But the performance of spinout schemes varies widely across Europe. Universities tend to take double digit ownership, however exceeding 20% equity can risk deterring future investors.
"We go to universities that have more friendly [equity] terms for the founders," says Johannes Triebs, partner at Earlybird-X, an early-stage deeptech fund partnered with more than 45 universities across Europe.
For academics making the career switch, investors promising follow-on capital can provide a sense of security. “We start small, but we can follow on later… so the entrepreneur knows we’ve got their back,” says Morteani.
3/ Increase specialist investors
Deeptech startups have a technical language, which is challenging for generalist investors to dissect.
Consulting scientific or academic experts is common due diligence. However, advisors may not think in terms of startup innovation, says Dr. Sabrina Maniscalco, CEO and cofounder of quantum startup Algorithmiq, which raised a €13.7m Series A round this year.
Without deep sector knowledge, it’s hard for investors to distinguish hype from breakthroughs. “The climate tech scene has too few people with a real understanding of these sectors and of these technologies,” says Morteani.
Specialist investors are also mostly focused on seed stage, but there’s a gap at Series A onwards — 50% of late-stage deeptech funding came from the US and Asia last year.
This may be because deeptech is a hard sector for VCs to get to grips with: you make $5m worth of “mistakes” before becoming an experienced investor, says Traversone.
Experience and pattern recognition count too. “Your company is sometimes four degrees away from the ultimate customer. The signal you're getting from the market goes to four filters. You have to guess when that’s happening,” he adds.
NATO Innovation fund will be discussing the deeptech breakthrough and whether defence tech is no longer taboo in Europe at the Sifted Summit. You can get your ticket for the event on October 4-5 here.