Can deep tech startups become unicorns? Notes from the Entrepreneur First event

On October 23rd, I attended a panel organized by Entrepreneur First at Station F entitled “Can deep tech startups become unicorns?” Here’s a summary of my own key learnings and things to look out for in the deep tech ecosystem.

Featured on the panel:

Lionel Mora — Co-founder & CEO, Neoplants

Alexandre Terrien — General Partner, Future Positive Capital

Raphael Biojout — Deep Tech Innovation Director, Bpifrance

Moderated by Coralie Chaufour — General Manager, EF

Why is it a good time to talk about deep tech in France?

There’s been considerable enthusiasm recently about the emergence of early-stage companies that are referred to as “deep tech”. It has now become a generally accepted term to describe radical tech products that stem from scientific research in healthcare, agro-tech, robotics, and more that could potentially create or disrupt entire markets. So, why talk about them now?

• The French government announced it will invest 1.3 billion euros to support technical innovation
• In 2019, we hit the record number of deep tech scaleups created with France being one of the top providers along with Germany and the UK (EIT Digital Challenge).
• According to EF, Deep tech would be the fastest-growing category for early-stage funding since 2014.

How are US venture capital funds more equipped to invest in deep tech?

While there is much excitement, let’s not forget that deep tech is nothing new on the other side of the Atlantic where scientific research has been tied up with entrepreneurship for a long time. As an example, we estimate 4,198 deep tech companies were founded in the U.S. in 2019, almost 10x more than Germany (RXALL). But what are the factors behind such success?

According to Alexandre Terrien, there are structural constraints that prevent EU venture capital funds to support those companies at an early stage.

1. Tier one US funds have more money in the back, with sometimes over 1 billion in management.
2. This allows for more flexibility and less pressure.
3. This increased funding capacity also makes that they can invest in big bets, a very early stage.

This fundamental difference means that European funds need to be a lot more careful, diligent and disciplined about the type of investment decisions they make. This is relevant for deep tech startups which may require 2–5 years of R&D development before the product is available to the market.

Which qualities do investors look for when interviewing technical founders?

There are not that many funds that focus on hardware solutions or tech companies that have emerged from research labs or from a PhD thesis in physics. Entrepreneur First changed the game by introducing talent-investing but it was still considered avant-garde up until recently. Now, more specialist funds such as Future Positive Capital are emerging Alexandre Terrien, GP, described how he evaluates founders that come from a scientific or technical background.

• Do they have a sense of how to build a business in addition to their academic background?

Founders should have a product mindset meaning that they should be able to identify direct benefits to customers. If the technology does not have an immediate or short-term market application or if the founders do not have a well-rounded go-to-market strategy, it’s a no-go.

• How potentially disruptive is the technology they are using?

The specificity with deep tech products is that they have the potential to create entirely new markets or to disrupt existing ones. Alexandre mentioned the example of the construction and cement sector, which is responsible for 8% of global carbon emissions. They interviewed a startup that wants to use inorganic additives to modify cement properties in order to reduce carbon emissions. Pretty cool.

• Team is everything

When interviewing early-stage companies, investors take a lot of time evaluating the founding team. That’s even more true for deep tech where scientific knowledge or expertise is a core asset to the project. Neoplants, a synthetic biology startup, was co-founded Liona Mora (ex-Google) and Patrick Torbey, who completed his PhD in genome editing at ENS. The two of them make an incredible pair but it’s hard to find founding teams that have reached synergy.

What is Bpifrance’s plan to increase the number of startups?

In recent months, France has made a push on deep technology and artificial intelligence. There is not one week that goes by without a government-sponsored conference or event related to high tech innovation. In this context, Bpifrance’s mission is to become “the one stop shop for entrepreneurs” by providing them with public non-diluted funds, resources, and ecosystem leverage. Raphael Biojout, Innovation Director, explained how the investment bank plans to double the number of startups stemming from academic research.

• In early 2019, Bpifrance announced a plan of 800 million euros over 5 years for deep tech and recently decided to increase this budget to bring out new startups and help them grow.
• Develop partnerships with SATT (technology transfer offices) to improve the intellectual property and licensing strategies in public research.
• Launched a Deep Tech Tour that goes through 20 French university campuses to build bridges between entrepreneurship and academia.
• The Deep Tech Week, happening in March 2020, will gather actors from the French and international deep tech ecosystem: Hello Tomorrow, BCG, SOSV as well as universities, research centers, accelerators and more.

How many unicorns from deep tech can we expect in the coming years?

While a lot of initiatives are getting set up, the creation of early-stage deep tech companies is still minimal compared to the whole ecosystem. In France, Ynsect, which operates in the agri-food and environmental biotech industries, is one of the only unicorns (raised $125 million in Series C in February) along with some advanced AI companies which we could refer to as deep tech.

Alexandre pointed out the different risks these companies are facing such as getting acquired as a tech asset by larger firms or failing to address an immediate market need. Even the words “deep tech” may be confusing as it prevents for more accurate segmentation by investors. However, there is hope! Considering the interest from both the private sector and public stakeholders such as the European Commission, which recently unlocked 30 billion euros for technical companies, 11 of which are focused on sustainability.

This might just be the beginning of the maturity journey in the deep tech ecosystem…