Embracing New Investment Models for Deep Tech
“We cannot solve our problems with the same thinking we used when we created them.” — Albert Einstein
Recently, I have been inspired by cooking. Fine dining, in particular, and discovering the journeys of renowned chefs worldwide have taught me that there is such beauty in creating experiences driven by food, evoking emotion. While I might only replicate this very basically in the form of Sunday gravy, I energetically believe in and am driven by continuous, multi-faceted learning — even through textless mediums.
The prominence of this unexpected inspiration is the intriguing line of risk that a chef must balance upon to reach and maintain their differentiation while creating extraordinary dishes (and often, new tangents of a cuisine altogether). Take too little risk and you do not stand out to customers. Take too much risk and you overcompensate, misstepping the path towards fulfillment. It is not surprising then that, as entrepreneurs, great chefs must be truly visionary in their craft while delicately evaluating the system in which their vision can become a reality given the risks. A delicacy that must also coincide with adaptability, for ingredients, customers, and social trends may change more frequently than expected by even the most experienced chefs.
I find it fascinating that many legendary chefs began their journeys through pure passion, mentorship, and discovery. I have not seen or read of a notable chef who has not spent countless nights in their restaurant or home, tinkering away with new combinations of ingredients. Just as chefs experiment in the kitchen, seeking treasure in their fare, scientists and engineers experiment in the laboratory with strikingly similar devotion.
With our climate trending towards being uninhabitable alongside other pressing global issues coming to a head, the world needs people to work together across boundaries now. By addressing complex and fundamental problems, deep tech ventures inherently target high-impact opportunities. Despite increasing investment in this space, frictions persist among the deep tech investment chain, among others:
- The overall innovation investment mindset has deviated towards lower risk profiles and expectations of quicker returns, permeating throughout the investment chain, including LPs. This has created somewhat of a negative feedback loop for deep tech investment theses, fundraising, and capital deployment.
- Current private equity investment fund structures are fundamentally unfit for deep tech investments (lifetime, size, incentives).
- Government & Institutions power research in universities, but generally lack ecosystem support for deep tech ventures to move them from grants to venture-funded and scaling.
It has become clear that narrative shifts are required to align private markets with climate finance principles — it is not only a unique opportunity for investors but an ethical imperative. BCG & Hello Tomorrow Ventures have covered the paradoxes that exist around this area in detail. Broadened investment principles exhibit the eminence that deep tech capital is adaptive, offers a wider array of financing tools to ventures, and presents new value propositions to LPs willing to diversify their risk profile and maximize climate-positive impact.
Regrettably, innovation investment mindsets have trended in the wrong direction — too often do we see GPs manage funds in a way that maximizes value to the fund rather than the portfolio companies. This could involve selling a position too early because of the fund’s limited life (7–10 years) — this “time pressure” is associated with common private fund structures we see in the market today and can be traced to persistent investment strategies toward digital products.
Whether they seek to manage “permanent” or “patient active” capital, different options exist for private market allocators and investors. Evergreen funds refer to structures with no end date or fixed capital quotas. As efficiencies continue to arise in the private markets through new platforms, data providers, and modern fiscal policy taking shape, open-ended fund types could continue to gain traction among private market participants seeking further diversification and strategy alignment with GPs.
Although challenging components of evergreen structures exist, such as deal flow and redemption requirements, when it comes to investing in deep tech the pros can outweigh the cons. Liquidity management being integral, the potential to have multiple private market exposures within the same vehicle (i.e. a fund may hold private credit, private equity, and primary fund investments, for example) gives LPs a nice value proposition — they would not have to seek different fund managers per investment type and portfolio companies benefit from connections to additional stakeholders.
At the outset of the deep tech investment narrative shift, evergreen funds look to align very well with the deep tech investment thesis. According to a survey of investors from BCG & Better Tomorrow Ventures, the ideal mechanisms to support long-term investment in deep tech lean in this direction: 44% would prefer an evergreen fund, 37% would opt for a 15–20-year fund, and 35% for successive 10-year funds. Some deep tech funds have already set up longer lifetimes: Future Ventures is 15-years; The Engine is 12-years extendable up to 18-years; Ahren Innovation Capital is up to 15-years.
To imply mise en place, new funds that are flexible on individual investments’ times to exit are more suitable for the deep tech ecosystem, which would prepare it for more favorable outcomes. Although not true of all deep tech ventures, many may require longer investment timelines to allow R&D to be de-risked and the first product to be launched. Behaviorally speaking, it is feasible that longer fund lifetimes enable a better selection of top-performing assets and greater realization of value from growing ventures as investment processes would likely change to complement this mindset shift.
Today’s deep tech narrative is nurtured at the venture level, where market and science risks are generally overrated by investors and telling the right story across the investment chain remains elusive. Finding key partners to de-risk problem/market-fit and accelerate cost analysis learnings is essential to translating opportunities together.
Certain evergreen fund structures might be ideal for individual investors and corporates as they present especially strong potential advantages and alignment with deep tech ventures. Those that are in a position to deploy capital quicker can eliminate cash drag and expose the investor to data/information in advance — a critical detail for investors who seek strategic value or do not have infinite investment horizons the way a pension fund or endowment might. For deep tech ventures, corporates are great partners for accelerating the understanding of customer expectations and sturdy initial revenues, opening the door to adaptive financing tools (venture debt, revenue-based financing) and controlling equity needs over time (typically a main pillar of promising venture portfolio construction strategy).
Further, connections between deep tech stakeholders may also thrive from an ecosystem standpoint where government and university partners coordinate efforts on promising ventures. Introducing a better balance of funding needs between grants, government equity and private equity leverages the strengths of deep tech investors for venture identification and those of governments for strategic national funding from state-mission priorities. For example, the German Ministry of Economy has committed to mobilizing up to €30B towards venture capital — the DeepTech Future Fund being a core vehicle financed by the state.
As we see today, global financial markets are far from invincible. There are sound cases for the resurfacing of private markets investment, and smart investors know that to obtain alpha they must be invested. For deep tech investors, this may be the opportune time for finding the most defensible, prudent ventures we have ever seen. The ability to invest with flexibility and nimbleness in evergreen funds is an important factor to consider when evaluating strategy to overcome the cyclical challenges of private markets.
Rethinking value chains with our environment as a stakeholder will fundamentally change the way we view engineering, business, and societal progress. Governments, companies, and investors must learn and understand the differences in economics of deep tech ventures and their second-order effects. This, alongside translating the value in the adaptive design and financing principles deep tech ventures can materialize, can embed new norms of investing in nature-forward economies.
I am excited to see who will step up to support the deep tech ateliers of the 2020s, ’30s, and beyond.
Additional Resources for the Deep Tech & Private Markets Landscapes
The Case for Building Corporate Ventures Using Deep Tech — Boston Consulting Group
Deep Tech Ecosystems — Boston Consulting Group
Deep Tech Observatory — Hello Tomorrow Ventures
Deep Tech Investor Mapping — Hello Tomorrow Ventures
European Deep Tech Investors — Sifted
Evergreen Funds: The Next Frontier for Private Markets Investors? — Partners Group
Private Markets Due Diligence: Investment Strategies and Fund Structures — Hamilton Lane
Private Markets Due Diligence: Evaluating Evergreen Funds — Hamilton Lane
