Diffblue, a deeptech company that saves developers time by automating the writing of code, span out of Oxford University in 2016. It raised the largest AI Series A funding in Europe with Goldman Sachs a year later.
“The first thing you look for in a deeptech investor is somebody who really understands the space you are in and the problem you are trying to solve,” says CEO Mathew Lodge. “Goldman Sachs invested in us as they understand our challenge, and they have been great at introducing us to their customers to help us build our pipeline.”
As deeptech companies begin to scale, it becomes less about focusing on the tech and more about solving their customers’ problems, adds Mathew. He provides the example of having to support the multiple operating systems used by its customer base. “It’s not a hard computer science problem, but it is difficult and challenging.”
Mathew also encourages deeptech scaleups to form a strong board. He praises Diffblue’s Chair Jane Silber, formerly of open source giant Canonical, who has “great operational experience and has been able to help us think through different challenges and problems.”
Unlocking scalability can also come from the tech side. Cardiff-based AMPLYFI, a deeptech company whose Insights Automation Platform uses machine learning to help organisations generate revenue from their research, has seen its scaling challenge transition in recent years from “creating interest” to “scaling delivery”.
“The most recent jump in scaling up has been embedding our capabilities in a range of intuitive applications,” says Head of Marketing Warren Fauvel. “This has enabled us to operate in a more scalable, market-driven and self-service manner – driving costs down and return on investment up for our customers.”
Deeptech represents a new era of advances in technology, succeeding mobile and cloud computing as the next major trend to fundamentally shift the role that technology can play. Its companies operate in a wide range of sectors and the technology itself is varied – including biotechnology; quantum computing; semiconductors; blockchain; cyber and robotics.
Deeptech innovations are rooted in ground-breaking scientific research, allowing them to solve huge global challenges that are beyond the scope of regular startups – from fighting cancer to cleaning space debris.
But alongside the potential for wide-reaching applications and problem-solving, science-driven startups can also be distinguished by the significantly longer time-frames and specialised resources needed to take their innovations from the lab to a commercial product.
“We define a deeptech company as one bringing a new foundational technology that has the potential to radically change how an industry or even the world fundamentally works,” explains Cambridge Future Tech COO Xavier Parkhouse-Parker. “The tech and engineering challenges are great, and a deeptech venture is hungry for talented people – often with very specific knowledge and experience requirements.”
Some deeptech companies will pivot and change direction altogether. Darktrace, and simulation software Unicorn Improbable, a Tech Nation Upscale alumnus, both began as deeptech before pivoting to Enterprise SaaS. “Some deeptech startups begin merely selling into laboratories before building out a SaaS platform to scale, which can totally change the dynamics of a business,” says Isabel Fox, cofounder at deeptech VC Luminous Ventures.
“You don’t mind that as a VC – it’s better to know what’s not going to sell and pivot,” she explains, comparing investors’ desire to see their portfolio companies succeed to the pride parents take in their children. “After all – people don’t want their babies to be called ugly!”
The biggest deeptech companies can scale to achieve $1bn-plus valuations. Tech Nation has supported several on our growth programmes – including Future Fiftyalumni Babylon Health (valued at $2.1bn), Darktrace ($1.8bn), and Benevolent AI($1.2bn). Our Applied AI growth programme, now onto its second cohort, seeks to contribute to the creation of more deeptech ‘Unicorns’.
For deeptech founders, growing a successful venture requires serious passion, bordering obsession, for their very niche line of work. For a start, the scaling journey of a deeptech company is long and arduous, navigating multiple phases that come with unique challenges. While deeptech startups are just as likely to exit as regular ones, it can typically take between 8-12 years for VCs to see returns, versus 3-5 years.
To progress from running lab-based experiments to prototyping products, deeptech startups require investment and support at a very early stage. But typically, significant investment is hard to come by without a prototype already developed and proven, which puts many entrepreneurs in a catch-22 situation.
With backing, promising ideas can turn into commercialisable opportunities that lead to rapid growth, but backing an innovation in the R&D stage requires a huge leap of faith for investors who would otherwise be asking for hard evidence of market opportunities for a product already in beta. Many early-stage deeptechs will need support from various sources along the way: academia, government, specialist investors and corporates.
Back to basics
Due to extended R&D timeframes, gathering critical customer feedback and product validation can take longer for deeptech startups versus agile internet/SaaS ones that can spin up a cloud-based MVP over a weekend.
“It used to be that all businesses were like deeptech ones – you had to make something [first] and then sell it to people, and unless they bought it then you didn’t have a business,” says Alex van Someren, Managing Partner at Amadeus Capital Partners. “With deeptech, you might spend up to three years building your highly polished machine before you get a chance to put it in front of real customers who tell you whether it’s something they want or not.”
Alex, along with colleagues, sits on the boards of Amadeus-invested companies – such as University of Cambridge spinout Nu Quantum, which is developing state-of-the-art cryptography systems. He says that deeptech investors should be supporting deeptech entrepreneurs by imparting their knowledge of commercialising technology: “Most entrepreneurs learn as they go along – they aren’t born with this knowledge, and enterprise sales is a grind.”
Knowledge-sharing is crucial for all entrepreneurs, but particularly for anyone fresh out of a research role and new to the commercial “grind”. Online events have been an important source of learning during the pandemic. The Deep Tech Network, for example, launched last year to develop a deeptech innovation ecosystem around Imperial College’s White City Campus in London.
“At one of our events, a founder may have a conversation with someone who’s tried their planned route and learnt important lessons about what does and doesn’t work,” says Simon Hepworth, Director of Enterprise at Imperial, who points to an upcoming event on Feb 25. “That short conversation can build confidence and potentially even save months of development time.”
In the UK, top deeptech companies spin out of university accelerator programmes, which provide mentorship, access to R&D facilities and introductions to investors in exchange for a small amount of equity. Some universities have their own venture arm that helps to identify spinouts with scaling potential. But what does scaling potential look like?
“It takes capital, great management talent and a market opportunity for deeptech companies to scale,” says Martin Fiennes, Principal of Deep Tech at Oxford Sciences Innovation, which invests and builds Oxford University spinout companies capable of tackling major unmet needs. “There has to be a need, and a technology that fulfils that need, with a real step-change improvement in what’s gone before.”
Identifying and refining exactly what the market and scaling opportunities are can be a challenge for deeptech companies and founders; in many cases the core innovation could be applied to a number of use-cases. The problem with commercialising university IP, explains Robert Walker, Head of Business Engagement at the University of Essex, is that research value and business value are not always in line.
“We’ve worked with several spinouts from Cambridge, and all struggled to coherently translate research-driven products and services into punchy commercial narratives,” he shares. “We support these businesses at the grant application stage by neatly positioning their business case against the advances in research within a given project.”
Spinouts enter a formal contractual relationship for the use of IP developed at universities. This can inhibit a startup’s growth if handled badly, warns Andy Collins, Business Development Associate at the University of Bristol’s Quantum Technology Innovation Centre (QTEC), which runs a programme that helps academics build businesses around quantum technologies.
“Make sure there is a clear definition of who has the right to own the IP, what the IP strategy is (and how it will be exploited), and what the technology roadmap is,” he says. “The university may have paid for expensive items of infrastructure, which is a good thing, but you have to know who owns what before you start – arguments about IP and ownership among the founding team will only slow things down the line.”
Deeptech companies founded by academics also encounter cultural challenges as they grow. “Many companies have a high percentage of PhDs, and the shift from developing a product to having a sales engine can be a big cultural change,” says Isabel Fox. “Due to putting in things like KPIs and OKRs, it becomes a much more corporate kind of environment, which people don’t expect. Getting culture right, keeping talent rewarded, incentivised, engaged and happy is the hardest part of the journey.”
Recruitment is a particular pain point for deeptech scaleups those in smaller sub-sectors such as space tech. As Joshua Western, CEO and co-founder at Space Forge, explains: “Satellite engineering is a rare skill in the UK and rarer still to find somebody with that experience or interest who is keen to join a startup.”
Founders need to “hire smart” to plug gaps in their own capability, advises Ash Ravikumar, Entrepreneurship Development Officer at CERN research lab, which collaborates with deeptech companies. “Deeptech founders have expertise in their field. A PhD in particle physics does not necessarily translate to sales or legal expertise,” he says. “A good startup will hire a VP of sales or marketing in its target market to address a weakness and scale that function out.”
Deeptech scaleups seeking specialised talent can collaborate with higher education institutions to benefit from their magnetism. “We often hear of the value of ‘power by association’ for attracting deeptech researchers,” says Robert Walker.
The university facilitates new collaborations and partnerships for deeptech companies, which enables scaleups to feel part of a ‘bigger’ team tackling tech challenges. “A scaleup recently struggled to recruit for a computer vision researcher prior to engaging with Essex – through collaborating we witnessed 50 applicants for a similar role,” he adds.
Investment is critical to scaling deeptech businesses – for both the capital and the connections and expertise that comes with it. Deeptech companies have a very different risk profile compared to other startups, and this will change significantly as the company grows. In practice, this means that founders must adapt their pitch and proposition along the way.
“The main barrier to scale is access to investment, and it’s really important for the leaders of any space tech company to strike the right balance during the scale up transitions,” says Gail Eastaugh, Programme Director at AeroSpace Cornwall. “The startup risk-taking attitude required at the beginning of the journey is very different from the one needed to reassure investors that the technology is sustainable.”
For Alex Van Someren, a capable team – defined by its “level of drive, persistence, creativity and intelligence” – is the most important quality in an investable deeptech company. The second is size of the growth opportunity.
Most deeptech businesses will fail – normally due to an inability to find product-market fit, under- (or over-) investment, or failure to execute on a sales and marketing plan. To balance the risk, Amadeus seeks companies targeting markets “in the billions” that would potentially return a whole fund from a single investment, making up for lost investment from businesses which won’t survive. Timing can be a critical factor to success.
“Deeptech is whatever the new thing is at the moment, and part of the challenge and joy of venture is trying to be accurate – not too early – in predicting when things are going to become commercially successful,” enthuses Alex.
With the innovation currently being demonstrated by UK deeptech companies, there is a sense that Alex will be enjoying that challenge for some time to come.