These are two key questions that my partner, Colin Webster, and I discussed when we were establishing RiSC Capital to make seed investments in early-stage startups. While Deep Tech is described in different ways, we wanted to draw a line in the sand. Here’s how we view Deep Tech:
There are only a handful of Deep Tech investors in Canada, compared with over 100 in Europe and the US. We have a history of squandered Deep Tech innovation.
Deep Tech is a science-based technology that creates disruptive advances in the way that we fundamentally do things. It is a technology like AI, new materials, biotech, sensors, and flight.
Deep Tech often starts with an idea requiring exploration and experimentation. This can take a lot of time, and it usually happens at universities or within a lab. R&D leads to a prototype, followed by a minimal viable product (MVP). A small percentage of these projects discover a commercial application that leads to an in-market product.
Much of this work is financed by non-dilutive vehicles like grants from the federal and provincial governments, academic institutions, corporate research grants, and tax credits.
Unfortunately, Canada is late to the game of Deep Tech investing.
There are only a handful of Deep Tech investors in Canada, compared with over 100 in Europe and the US. We have a history of squandered Deep Tech innovation, highlighted by the Avro Arrow, which was the world’s most advanced aviation technology in the 1950s.
But Canada is starting to understand the value of Deep Tech. In the past three years, significant amounts of money have propelled innovation like AI (an area in which two of the three godfathers of AI/machine learning, Geoffrey Hinton and Yoshua Bengio, are Canadian).
As important, Canada is starting to see DeepTech success stories like AI startup Rubikloud, which was recently acquired by Kinaxis for $81.4-million, and Cinchy, a data fabric platform, which raised $10-million.
Canada has talent, lots of it. And there is significant support at the R&D and pre-seed stage for DeepTech. But here are some key challenges facing Deep Tech in Canada.
Canada hasn’t focused on taking technology risks as much as the U.S. A good example is a new $60 million fund focused on entrepreneurs with “technical insights”.
Innovation is coming out of universities and Canadian scientists but it doesn’t have capital from the funds to help them turn their ideas into businesses that can grow and scale. As a result, the innovation withers on the vine.
While there is not much competition in Canada for investing in Deep Tech at the seed stage, there is a growing capital for Series A and beyond.
In contrast, Deep Tech investing globally has been growing by 22 percent a year over the past five years to over $20-billion. There are a few reasons why DeepTech is attracting more capital.
In recent years, the maker movement, cloud computing, data science, electronics, genetics, and aviation has allowed for cheaper experimentation and prototypes.
The general evolution of technology has put more complexity under the hood. The smartphone is hundreds, if not thousands, of person-years of innovation for $400. The camera alone is a culmination of decades of R&D.
Engineers are becoming investors. Investing in Canada has traditionally been done by people with a financial background. The new generation of investors was raised on the Web and may even have built and sold a technology company.
We are excited about seed-stage Deep Tech investments. By the time that we are exploring an investment opportunity, a lot of work and development has already gone into the company – often paid by grants and in-kind support. The IP is usually well protected, and the inventors are often world leaders in a particular niche. The company, however, doesn’t have a valuation associated with a substantial revenue milestone.
While there is not much competition in Canada for investing in Deep Tech at the seed stage, there is a growing capital for Series A and beyond, driven by the Venture Capital Catalyst Initiative (VCCI).
Another reason that DeepTech is interesting is that due diligence is often more complicated, but it is offset by the lack of skeletons in the closet for the early-stage deals attracting our attention.
While some Deep Tech startups need a lot of capital to commercialize, we believe there will be a growing number of smaller and strategic investment opportunities, including companies that are pre-revenue.
Pre-seed and seed companies can involve higher-risk but there is major potential to capitalize on the knowledge, skills, and strengths of smart entrepreneurs looking to develop disruptive technology that can be developed into game-changing products.
Some of the most exciting Deep Tech sectors include:
- Advanced materials
- Artificial intelligence (AI)
- Drones and robotics
- Photonics and electronics
- Quantum computing
These areas account for the most active and promising Deep Tech. They span the spectrum from early research to market applications in full development.
Photo by Clément H via Unsplash