Dive in: Where Deep Tech has been – and where it’s going

Ash Kumaraswamy, Investment Director

16th May, 2022

Deep Tech is now a fashionable sector for investment. Since 2015, global investment in Deep Tech has increased 20% year-on-year[i]. This is not because the visionary ability of entrepreneurs has improved – there have always been big-picture thinkers – but the Deep Tech ecosystem around them has changed. Critical resources like financing, skilled workers and technology are more readily available to entrepreneurs to help them take their pioneering ideas to market.

The increase in investment in the sector indicates that market reception of Deep Tech businesses has changed. For a long time, investors in the UK and Europe were cautious of this high-risk sector. Deep Tech businesses usually need more time than commercial technology businesses to progress from an idea to a successful exit. Additionally, the space is inherently complex, as it often involves the intersection of multiple industry segments. An average Deep Tech business (if there is one) is one in which digital/software interacts with hardware, material or biological systems. It is fertile ground – the kind of sector in which a PhD chemist’s thesis can develop over time into a commercial product with a significantly positive environmental impact. Getting there requires researchers, a management team and investors with the talent to understand both the risks and rewards.

Deep Tech businesses are currently a small portion of start-ups, but the influence they have is outsized because they are solution focused. It is estimated that 97% of Deep Tech companies fulfil at least one of the UN’s 17 Sustainable Development Goals[ii]. Despite the sector’s ability to create an impact, Deep Tech businesses often struggle to get early and mid-stage funding. The funding problem is exacerbated by how much Deep Tech businesses need to spend to be successful; the reality is that a biotech company requires an average of six times more capital than a blockchain business to create an initial prototype[iii].

Libertine, a business that develops smart engines for automotive and distributive power generation set-ups, struggled to access funding before Mercia invested in 2017. The market was favouring battery technology as the solution to support electrification, but the team at Libertine had rightly assessed that it was not the optimal solution and would not work for every vehicle. For example, fitting purely electrical powertrains into long-haul vehicles requires large up-front costs and poses accessibility challenges, as charging infrastructure is still limited. Factors like this could deter hauliers from adopting zero-emissions technology.

The team at Libertine set out to solve these pain points to ultimately increase the uptake of net zero vehicles. Its solution was to invent and build a smart engine that would convert renewable and electric fuels into electrical efficiency. Mercia’s involvement helped reshape Libertine’s value proposition and attracted interest from solutions-minded individuals. However, it was still a challenge to access scale-up funding for Libertine – it seemed that the market still failed to fully appreciate the potential impact of Libertine’s technology as a crucial factor in the future decarbonisation of the automotive industry.

Mercia energetically responded to the challenge of funding Libertine. When we believed the time was right for capital markets funding, Libertine was listed on the London AIM market – and accessed the financial support it needed to scale. Libertine’s market capitalisation was c.£27million when it was first floated on AIM, and now it is c.£37million. Having successfully accessed the funding it needed, Libertine is now going through the productisation phase and working with Fortune 50 businesses to transform vehicle electrification.

As a specialist asset manager, Mercia has proven itself to be agile and adept at facilitating funding for early-stage businesses that provide solutions. Whilst this calculated risk-taking is more established in the US, a certain conservatism remains on this side of the Atlantic. Mercia took thoughtful risks in the Deep Tech space before it was fashionable – and is now seeing these investments bring rewards.

Faradion provides a fine example of how beneficial Deep Tech investment can be – for shareholders and the public. As a Mercia Investment Director, I cofounded the business alongside Chris Wright and Jerry Barker. Together, we foresaw the rush and need to access sustainable raw materials with a secure supply chain to address the growing hunger for more batteries with an alternative base material to lithium.

Lithium and cobalt are more notorious today for their negative environmental impact than they were in 2009, but the team believed – as emerging research was suggesting – that there was a better way to build batteries. Having previously evaluated around nine UK battery technology businesses in the UK and deciding not to invest because their IP was incremental, rather than a more fundamental change in subject matter, we began evaluating technologies and settled on sodium-ion, as sodium is abundantly available.

Mercia exited Faradion 11 years after its first investment. The £100million sale also brought £25million of new investment into Sheffield for Faradion’s next phase of growth, and it generated an internal rate of return of 72% for Mercia.

Deep Tech businesses address fundamental problems; aside from the clear benefits in terms of social impact, they provide a practical framework that helps businesses scale. The businesses are usually purpose-driven, and the operations, technology and sales functions are developed to be optimised to fulfil this purpose. A purpose-driven mindset helps management teams develop efficient operational systems in singular pursuit of that purpose. As a result, Deep Tech businesses scale well, if they retain a clear, mission-led objective that drives their commercial operations.

Mercia has invested in the Deep Tech space for around 13 years, and it continues to use that heritage of expertise to support portfolio companies, such as Impression Technology, Mindtrace, Uniphy, Warwick Acoustics and Logically, as they grow. Logically is an early-stage tech start-up that has, so far, had a very promising trajectory. Founder Lyric Jain created Logically after observing how influential the disinformation campaigns were during the 2016 Brexit and US election campaigns. It developed a powerful artificial intelligence engine that classifies content into 14 categories of biases to identify disinformation, with a human-in-the-loop to ensure veracity. Logically recently raised £14.3million in investments from Vitruvian Partners and Amazon to complete its product development, scale and expand. It is currently working with governments around the world to identify disinformation campaigns and nullify their threat to democracy.

When others were still reluctant to invest in the sector, Mercia was busy helping to build management teams and create value. Today Mercia can look back on its legacy of Deep Tech investments and confirm that it has generated results. Businesses such as Libertine, Blue Prism and Faradion were carried from early-stage to international recognition. This is testament to the skill that Mercia has in supporting businesses to scale – primarily due to its supportive approach.

Another aspect of Mercia’s approach to value creation is the quality of talent it helps attract to start-ups, where typically that level of expertise would be out of their reach, as well as how deeply the management team understands the risks, value inflection points and effort needed to build global Deep Tech companies from idea to scale.

Today, Deep Tech companies in Europe have a combined worth of €700billion.[iv] It is anticipated that the future of the sector lies where user behaviours and societal data collected from multiple platforms will shape forthcoming technological inventions, whereas over the last decade or so, technological innovation has influenced or changed people’s behaviours and actions. Mercia envisions the Deep Tech businesses of the future as those where human biology and intelligent hardware intersect with intelligent software.

Mercia is proud to be one of the few UK investment houses that has over 13 years’ experience in the sector. While others considered the sector too challenging, Mercia was prepared to support the potential it saw in regional Deep Tech SMEs. It is that heritage of expertise that means Mercia is primed to support the Deep Tech start-ups of tomorrow.

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[i] A Deep Dive to Deep Tech Investing (bcg.com)

[ii] Deep Tech and the Great Wave of Innovation (bcg.com)

[iii] Deep Tech start-ups: Next wave of global disruptors? | Business | Economy and finance news from a German perspective | DW | 14.05.2019

[iv] EUST-Dealroom-Sifted-Deep-Tech-Jan-2021-1.pdf

 

 

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