Doubling Down on Deep Tech
This piece was originally posted on the Fly Ventures blog
Any investor, no matter stage, sector or asset class has been asked one question over and over for the past several weeks: how is COVID-19 impacting your investment strategy? COVID-19 has permeated every element of modern culture so it naturally comes up in all of our (virtual) chats with founders, VCs and LPs. Most firms are slowing down (~50% reduction seems to be the average), some freezing completely and all are adapting in real time. When asked, our response at Fly Ventures has been “we’re doubling down on Deep Tech”.
What is Deep Tech?
Fly invests in two key segments of the broader Seed market: Enterprise and Deep Tech. The former is relatively straightforward; startups that serve large corporates / multi-nationals that command large annual contracts (€50K+). Our second focus, Deep Tech, is a bit more vague. Like “Big Data” or “AI”, Deep Tech is a term that means a lot of things to a lot of people. Fly’s defines the area as having:
A product that’s deeply rooted in advanced technology — i.e., building was not possible until very recently
A core offering built upon the technology itself as opposed to brand, network effects or regulatory certification
Technology that’s novel and very difficult to replicate, providing strong defensibility — i.e., no commoditized algorithms or open source data sets
Long product development cycles and higher capital requirements (but not always)
Typically close links to the latest academic research
Specific applications vary greatly and can touch nearly all of the economy. We see a lot of opportunity in broad enabling technologies like open source infrastructure, encryption, quantum computing and cyber security. But many of the most exciting projects we back take a targeted focus on industry verticals like healthcare, finance and mobility. (Fly portfolio)
Why double down now?
We feel this is a uniquely strong time to invest in Deep Tech startups because they’re uniquely immune to the effects of economic recession. Business has been significantly impacted by the necessary lock-downs currently underway, which can have drastic implications for a startup’s sales outlook. Our experience through past downturns tells us that client budgets will be frozen, corporate champions will be let go and contracts will be renegotiated, delayed or cancelled outright. Early-stage, Deep Tech companies aren’t heavily impacted by this because all they really need to do is build. That’s not to say that no client interaction is required. A limited feedback loop can inhibit product development or enable lost time due to chasing the wrong spec.
Limited client dependency provides a significant advantage for founding teams. Each startup’s needs are unique but the majority only require top talent, powerful laptops, a bunch of cloud credits and (now) a Zoom account. Compared to startups that rely on distribution partnerships or large field sales teams and the advantage is clear. Deep Tech startups retain their means of production so while the world’s on hold, they keep going.
We believe this period of isolated productivity will yield significant returns once the economy recovers. Most large enterprises are being significantly hurt by lockdown measures and will be desperate to regain their footing. Other, more aggressive, corporates will see the recovery as a unique opportunity to steal away market share, expand to new geos and attack weakened competitors. Advanced technologies have the transformational power to achieve these goals and move the needle. Corporate appetite to technology adoption has bottomed out for now and will remain there for some time (1–2 years). But when that appetite does come back our portfolio will be ready.
Is all Deep Tech created equal?
The market has a funny way of jumping onto trends. In 2017 every startup was an AI startup. In 2018 it was crypto. To be clear, not all Deep Tech companies will equally weather this storm. My favorite founder question as of late has been “if I gave you €1 million today what can you guarantee to show me in 6 months?” After two or three follow up questions it’s pretty easy to assess just how client dependent a startup really is.
If this sounds like a startup you’ve founded / work at, please reach out to anyone from the Fly Ventures team.