Tough Tech Musings
This week, I attended The Engine’s Tough Tech Summit in Boston. The prevailing sentiment was that venture investing in deep tech (businesses that address monumental challenges like climate change or cancer, beyond just software) is distinctly different from other early-stage sectors. Deep tech demands a unique blend of patience, tempered expectations, and a grasp of the technicals. In some contexts, early-stage investing in deep tech could be seen as an asset class distinct from conventional venture SaaS. Here are some of my takeaways from the event:
Pick your game, it’s all the same: When it comes to successful exits, the entry point doesn’t significantly alter IRR, given certain assumptions like time to exit and round sizes remain constant. Whether investing as an angel a decade prior to a multi-billion dollar exit or coming in as a late-stage growth investor a year before, the time-adjusted returns are strikingly consistent. Nevertheless, this perspective is a broad stroke, and considerations such as capital efficiency and dilution become pivotal, especially for capital-intensive deep tech companies. Investors must therefore recognize their strengths and craft strategies accordingly. Metrics like entry price and exit ownership remain critical irrespective of the investment approach. This might explain why crossover investors have misstepped in venture, but that’s a discussion for another day.
Patience is a virtue: None of today’s great businesses were built in three years. The recent venture surge fueled by ZIRP, the rise of crypto, and the “growth-at-any-cost” mantra have distorted both GPs and LPs’ expectations. However, the essence of early-stage investing lies in its long-term perspective and the anticipation of outsized returns. In deep tech, patience, coupled with astute company picking, are necessary to yield remarkable results.
Show the proof: Recent times have seen fundraising, especially for emerging managers, confront significant hurdles. Even prominent funds have faced challenges in reaching their objectives as large investors diversify away from venture and private equity. However, top LPs emphasize that substantial capital still gravitates towards tangible achievements. To succeed in this environment, the narrative surrounding deep tech investing must evolve. While the past saw deep tech often grouped with dirty words like “ESG” or “impact investing,” the focus has now shifted squarely to returns. As such, showcasing the capability to identify and back standout outcomes is paramount.
It’s about where we’re going: Echoing Peter Thiel’s words, albeit at the risk of sounding cliché, investors should identify newly emerging industries and markets and back the high-growth businesses within them. This sounds rudimentary, but deep tech necessitates a visionary perspective. Evaluating ventures requires us to project the potential unit economics of a technology once its risks are mitigated. While one should still account for technological risks, in the context of financial projections, the inherent optimism in venture capital should drive the belief in the technology’s eventual success and the ensuing market dynamics.
In conclusion, these reflections on deep tech investing might resonate as foundational principles, yet revisiting them periodically reinforces our commitment. Investing in tough tech is… well tough, yet the potential rewards make it a craft worth mastering.