The Rise Of UK Deep Tech Investment
Article courtesy of RLC Ventures
The UK is a nation of investors. For a comparatively small island nation, the country punches well above its weight, with over 325 VC firms registered with the British Venture Capital Association and an estimated 15,000 angel investors, according to the UK Business Angels Association’s 2018 report. However, not all investment prospectuses, no matter how well researched or presented, receive equal attention from this army of potential financiers. Historically, deep tech has been a hard sell for even the least risk-adverse firms, although, as we shall see, this is changing.
Before we delve into the reasons why cutting-edge technologies are no longer anathema to market-savvy investors, let's find out exactly what deep tech is, and what makes it different.
UK Deep Tech Company: Riverlane
A Definition of Deep Tech
In some ways it’s easier to define deep tech in terms of what it is not. It is not a new application of existing technology, a new piece of software or an app built on a pre-existing digital infrastructure. It isn’t even a new use for an under-utilised resource. So social media platforms, recycling ventures, most FinTech developments and SaaS platforms don’t usually count.
What would count is any business idea dependent on a brand new or emergent technology whose commercial applications are only beginning to emerge. Think biotech, quantum computing, blockchain, AI, gene-editing, or artificial meat production. All of these are substrates upon which deep tech ventures can be built.
23andme (gene tech), Upside Foods (lab-grown meat), River Lane (quantum computing) and Elliptic (blockchain) are all examples of companies which have secured investment whilst developing bold deep tech ideas.
Why Has Deep Tech Been a Challenge to Fund?
Historically, deep tech ventures have been difficult to invest in for several reasons: · Their core ideas are challenging to communicate to investors. · It’s hard to point to successful, similar ventures for comparison. · The opportunity to turn a profit may be tricky to define. · R&D forms a significant part of these investments and may take years. · The eventual payday, once known, may be many years in the future. · They are generally high-risk and can require significant cash injections. Thus, while initial excitement may be high, when it comes to nailing down the specifics of the deal, many firms’ ardour quickly cools. Despite these hurdles, deep tech start-ups have begun to see increasing investment in recent years in the UK, which begs a key question.
Why is 2021 a booming period for deep tech investment in the UK? First, let's look at some figures.
As reported in Tech Monitor, the British Business Bank’s Small Business Equity Tracker 2021 saw a significant rise in deep tech investment in the UK, as opposed to the US. Between 2018 and 2020, despite the COVID-19 pandemic, there were 201 deep tech investments per trillion pounds of UK GDP, as opposed to 121 in America. As a percentage of start-ups, deep tech companies made up 21.5% of UK companies receiving venture capital.
Techmonitor & Dealroom DataIn March of this year, the same site reported a record £15 billion of tech investment in the UK, compared with £9.9 billion in 2018 and just £5.9 billion in 2016. Almost two-thirds of 2020’s investment came from overseas.
What is causing this brave influx of overseas capital in a comparatively risky sector during a time of economic uncertainty?
In part, it may be due to high-profile examples of deep tech paying off. The mRNA vaccines developed in Germany and the US gave the world a vivid demonstration of how a revolutionary new genetic innovation could have world-changing consequences in record time. Meanwhile, highly publicised rocket missions were launching tech billionaires into space. The new space race also showed how public funds could be lucratively combined with private money to supercharge innovation in a risky sector with potentially lucrative returns. After all, there are minable asteroids out there worth more than the combined planetary GDP of Earth, as Forbes reported.
Quantum computing; AI and machine learning; even nanocarbon strong enough to allow the construction of a literal elevator to the moon. All these extravagant notions have been spun into social media friendly stories to divert us during a challenging time. Even the most hard-nosed investor isn’t immune to such flights of fancy.
There’s also the fact that some of these new technologies are effectively mandatory. You can’t compete in the digital marketplace without leveraging the algorithmic power of AI. Computers can’t get any more powerful without radically new types of microchips, or qubits replacing binary bits. Our climate crisis has added vital urgency to the development of new energy tech, including sea turbines, biofuels, and even nuclear fusion. And as they say, necessity is the mother of invention; perhaps venture capital is its father?
Why the UK?
Our island nation has a history of deep tech innovation, emerging from its world class universities and research facilities. The World Wide Web was born here, graphene was first synthesised at the University of Manchester and IoT pioneers Evrything are rendering our devices and products smart, data-rich and interconnected.
Only last month, Oxford’s Orca Computing reported its creation of a single-photon room temperature 4-bit quantum computer which it hopes will prove scalable and rival the “conventional” supercooled devices created by Google and IBM. Ambition we have in spades. We’re world-renowned for our STEM talent and academic resources, and now that deep tech has gone “overground”, global venture capital firms are scouring the UK for new opportunities to get in on the ground floor of future revolutions.
Why Invest in Deep Tech?
What benefits are these UK deep tech companies bringing to their VC partners? Firstly, the cachet and prestige of cutting-edge investment. Secondly, the potential for enormous mid to long-term rewards (mRNA vaccines are being developed for influenza and malaria; blockchain and cloud infrastructures are now ubiquitous). Lastly, and perhaps most vitally, they bring back the excitement that got many venture capitalists into the business into the first place.
Armed with more capital than ever, why not fund space elevators, disrupt global currency markets, or perhaps even help save the planet?
About the Author
We are a diverse team of former founders, tech-enthusiasts and experienced investors.