"Deeptech requires patient capital" is a phrase you’ll often hear investors in the sector repeat. The common belief is that science-driven startups need a longer timeframe than other tech companies to generate returns, making them a bad fit for VCs that expect to see their investment back within 10 to 12 years.
This belief does the sector a disservice, says Thomas Oehl, cofounder and general partner of German VC firm Vsquared Ventures.
His firm has just raised a new $165m fund to invest in early-stage European deeptech startups. It’s also hired a new partner, Lise Rechsteiner, who previously founded Norwegian deeptech VC Propagator Ventures.
The new fund
Vsquared will initially be investing up to $3m per company, in 20 to 25 startups. The rest of the money — about two thirds — will be used for follow-on rounds.
The partners aim to be the first institutional investor writing cheques for deeptech startups, says Herbert Mangesius, cofounder and general partner at Vsquared.
Vsquared focuses on varied areas including AI and robotics, new computing technologies, spacetech, energy transition, data processing and techbio. The new fund has already invested in two companies: Cylib, a German company that recycles lithium-ion batteries; and ConstellR, a German startup using satellite technology to prevent water and food shortages.
This, Vsquared’s second fund, is backed by the European Investment Fund (EIF) as well as family offices and entrepreneurs. “We’ve had lots of support from existing limited partners,” says Mangesius.
The deeptech opportunity
The founders of Vsquared have been investing in deeptech since 2016 and launched the first Vsquared fund in 2020, at the beginning of the pandemic. This didn’t stop them from putting together a portfolio of companies that are scaling very quickly, including deeptech soonicorns such as German spacetech company Isar Aerospace and Finnish quantum computing startup IQM — both were founded in 2018.
Drawing from six years of experience investing in the sector, the Vsquared team believes that deeptech startups can scale as fast, if not faster, than other tech startups. They have found that timing is critical when investing in a deeptech company, which is something they work on with founders before investing.
“We only invest if the company can be successful in a decade,” says Oehl. Vsquared will only invest in technologies that are based on proven science, but still need to deal with engineering challenges to scale up and deliver a product.
Despite the recent downturn, the partners haven’t found it particularly challenging to raise funding. Deeptech is not as influenced by trends in the public markets as other tech sectors, and European startups in the sector are on track to raise more in 2022 than they did in 2021.
Europe has the market, the talent, the research and now the public support too
“When we started, the word deeptech didn’t even exist,” Mangesius tells Sifted. Back then deeptech was considered a niche, but the perception has changed dramatically in the last couple of years, especially in Europe.
“Deeptech is now getting more attention and more funds are getting into it,” adds Oehl. “Lots of entrepreneurs that made money building deeptech companies continue to back the sector.”
Some examples are Christoph Ostermann, who sold his smart energy storage startup Sonnen to Shell, and Thomas Alt, who sold his augmented reality platform Metaio to Apple. Both have contributed to Vsquared’s funds as limited partners.
Public institutions and policymakers across Europe are also showing more interest in deeptech, Oehl says. They are starting to realise that the sector can address some of society’s biggest problems and have a lasting impact. And the ongoing war in Ukraine has brought the importance of Europe’s technological sovereignty to the forefront.
“Europe has the market, the talent, the research and now the public support too,” he says.