On Creating Deeptech Confluences: mobilizing private capital into ventures for humanity (Part 1)

Boston, MA — A Deeptech Confluence

This is the first of a four part series On Creating Deeptech Confluences. The work is based off my research & masters thesis at the MIT Sloan Sustainability Initiative. This post dives into the entrepreneur’s role in de-risking deeptech team & technology.

Introduction

Technology has always been a means to an end. A solution to a problem. Since ancient times engineers have used scientific knowledge to create useful technologies in construction, agriculture, transport and many sectors we know today. From concrete to batteries, these technologies have enabled us to become almost superhuman compared to past standards.

However in today’s information age, the word ‘technology’ has been largely used to describe a very specific kind of solution: namely ‘consumer’ and ‘enterprise’ software. These solutions have been solving various inefficiencies, including: inefficient business processes, inefficient marketplaces, inefficient(?) social interactions, inefficient transport, and inefficient entertainment for example. There is no doubt these solution have created enormous market value. But have they advanced humanity?

In this series I highlight ways we can redirect private capital into what Swati Chaturvedi, CEO of Propel(x) calls “deep” technologies (deeptech for short). These are breakthrough technologies in materials science, energy, and life sciences that have the potential to tackle our most “wicked” societal problems. By engaging 1) entrepreneurs, 2) investors, and 3) policymakers, we can mobilize private (and public) capital into ventures that advance humanity.

These self-reinforcing regional systems are what I call “Deeptech Confluences”. They engage our most powerful societal force of all — our global capitalist engine — to funnel ‘rivers’ of capital into solutions combating our most wicked problems. Each section highlights the role of each stakeholder in the Deeptech Confluence. I begin with the role of entrepreneurs in part 1.

Entrepreneurs: de-risking team and technology for success

Entrepreneurs are the foundation of any innovation cluster or Confluence. Without their passion and sacrifice, there is no technology commercialization. However in the Deeptech Confluence they have an even greater challenge to commercialize their technology. In order to successfully bring deeptech to market, they must de-risk their team and technology to the greatest extent possible. Below are three common strategies they employ to do exactly that.

1) Hiring seasoned management teams

Most deeptech ventures are started by scientists, professors, and graduate students with intimate knowledge of the science and technology. What they tend to lack is the business acumen, network, and management skills to raise funding and land customer contracts. Therefore a prerequisite for deeptech innovators is to bring on a seasoned management team with deep industry experience and commercial backgrounds.

Take for example Tri Alpha Energy and General Fusion — two premier “startups” trying to harness nearly unlimited energy through nuclear fusion. Both were founded by fusion physicists with decades of research experience. Importantly, both brought on seasoned energy CEOs with decades of operating experience. The result is Tri Alpha has raised $770M+ since 1998 and has reached a $2B valuation, while General Fusion has raised over $65M since 2002 from leading energy VCs and Jeff Bezos. Success is yet to be determined, but without balanced management teams they would have never have gotten lift off. Their backgrounds and experience immediately create a case for investment.

The seasoned CEOs serve other important functions necessary for deeptech to succeed. They network aggressively and tactfully with potential customers and partners (getting to know them before they need to pitch and sell anything). They say ‘thank you’ often and follow-up with everyone. They get to know people by name and understand their goals, roles, and perspectives. And they create a compelling company brand and identity with every interaction. The result is they gain champion supporters in all types of organizations. With key contacts warm and ready, they execute faster.

All these points highlight the need for seasoned professionals to de-risk deeptech teams for financing and sales.

2) Sequenced market entry

Every deeptech entrepreneur wants to hit a home-run from the start. Their investors do as well. They go for the $1B+ “flagship” markets where a 10% penetration means $100M+ revenues. While it is true entrepreneurs should go for their flagship markets, it is not necessarily true they should do it right away. Market timing is critical for deeptech entrepreneurs to hit technical and commercial milestones necessary to de-risk their technology.

Take for example Solyndra, A123, and KiOR. They all had the same market entry strategy of going straight for lucrative flagship markets (utility-scale solar, energy storage, and biofuels respectively). These are all markets that take significant time and capital to enter. The result is they all went bankrupt.

Rather deeptech entrepreneurs must infuse near-term and sequential thinking into their market entry strategies. Starting with a “minimum viable market” (MVM) is key to prove the technology faster and gain vital cash flow (diagram below). The technology is de-risked technically and commercially as it is further developed in each MVM. Over time it enables the team and technology to be much better prepared to profitably enter the flagship market.

Capturing MVM’s increases the chance of deeptech venture survival

Elon Musk and his ‘Master Plan’ of selling the Roadster, Model S, Model X, and Model 3 in that sequence is a prime example of a deeptech entrepreneur employing a sequenced market entry strategy. No current EV startup would ever be able to launch a sleek and affordable EV for the global middle-class right from the get-go (Faraday Future and Lucid Motors are both struggling to even release a luxury model). Musk began by leveraging the booming population of Silicon Valley tech millionaires to purchase high margin Roadster and Model S luxury cars. Eventually he expanded to wealthy financiers and old money in the northeast and europe by introducing the Model X sedan. Both these MVMs allowed him to not only finance the development of the flagship market Model 3 (via the gigafactory), but also establish customer confidence in the Tesla brand and product. It is team and technology de-risking at its best.

By beginning at low-volume high-value products, Musk was able to penetrate the heavily entrenched auto industry. He then built a brand and cash pile to deliver an affordable mass-market offering through the Model 3 (just recently released). However there are also other market sequencing strategies beyond targeting 1) customers with a high-willingness to pay. Other non-mutually exclusive sequencing strategies include:

2) Creating products that compete on a differentiated basis other than cost (e.g. Sistine Solar).

3) Targeting niche consumer markets with select interests (e.g. Sense).

4) Engaging companies that are mandated by new regulation or sustainability goals to improve their technology and operations (e.g. UtilityAPI).

5) Moving into emerging markets in the developing world that have little established infrastructure and incentives to adopt the best new technology (e.g. Promethean Power Systems).

The combination of these strategies leads to a technology falling down the price-volume curve. As MVMs are captured, the technology (and team) matures. Once it reaches a certain threshold of quality and bankability, it is ready to penetrate the flagship market (diagram below).

Strategies to capture MVMs & move down the price-volume curve

3) Use of established components, equipment, suppliers, manufacturers, and infrastructure.

Resources are scarce for any early-stage venture. For deeptech ventures they are even more so since they often involve exotic components and manufacturing techniques. Relying on these parts and processes usually adds significant risk to the technology. If a supplier disappears or a manufacturing process cannot be scaled up, the venture quickly runs into trouble. Therefore it is essential for deeptech entrepreneurs to use reliable components, suppliers, and manufacturers to the greatest extent possible.

Take for example NanoSteel, a materials science venture creating a new kind of steel. Their proprietary blend of alloys is based off years of research from the Department of Energy’s (DOE) Idaho National Laboratory. Despite having a novel technology, they created a philosophy of ‘easy to use, easy to produce’ whereby they stuck with conventional equipment and suppliers for maximum market traction. Their special materials were designed to be commercially processed using conventional mill equipment. Plus they were simultaneously designed for direct feed into their customer’s final assembly infrastructure. The result is the company has significant traction in multiple markets (all MVMs outside the flagship market of construction applications). They also have been funded by top-tier deeptech VC firms (Chrysalix, EnerTech) and strategic investors (General Motors).

Every venture has to decide at some point what to build in-house versus what to outsource. Nowadays with the rise of premier one-stop-shop design, supply, manufacturing, and logistics outfits, outsourcing has become exponentially easier for hardware-based ventures. They can take advantage of these firms to free up scarce resources that would otherwise be lost ‘reinventing the wheel’ with supply chain, manufacturing, and logistics work. Flex is a leading ‘Sketch-to-Scale’ company in this regard. We allow deeptech entrepreneurs to focus purely on fulfilling customer demand by handling as many intricate pieces of their supply equation as they wish (diagram below). Although we still do our own vetting, if passed it is one of the best ways for deeptech entrepreneurs to de-risk their technology from a supply standpoint.

Flex ‘Sketch-to-Scale’ services for supply chain, manufacturing, and logistics

Conclusion

The combination and permutation of 1) hiring seasoned management teams, 2) sequenced market entry, and 3) using established infrastructure all accelerate deeptech de-risking. They are the entrepreneur’s best friends when it comes to preparing for investment, pilots, and product sales.

In sum, the role of the entrepreneur in advancing the Deeptech Confluence is essential. They drive world-changing technology to the market. They are the foundation of the Deeptech Confluence. However they cannot succeed alone. They de-risk their team and technology in order to bring other enablers (i.e. investors and policymakers) to the table. Posts 2 and 3 will dive into how investors and policymakers subsequently deploy life-breathing capital and partnerships into promising deeptech ventures.