Deep tech - Ventures between start-ups and science

A number of years ago, four students had an idea: they wanted to build an electric aircraft that can take off and land vertically, flies in an environmentally friendly manner, travels at lightning speed and is ultra-silent. They were all engineers, and they knew a lot about technology. Their concept was based on the latest research findings and years of their own work. The idea was on-trend and had significant potential. But the question was: how were they going to fund it?

"Being naive helps," says Daniel Wiegand. The CEO and co-founder of the Munich-based start-up Lilium, laughs. "We knew we needed capital from the outset," recalls Wiegand, now 36, "but we didn't think we’d need so much." For starters, they built a prototype "in the living room and garage," and got Germany’s star investor Frank Thelen on board with their idea. He praised the founding team (link in German) for its "smart solutions" and helped bring other backers on board.

Today, barely six years after the company was founded, Lilium has raised more than 350 million euro in capital and, with its goal of reinventing aviation, is one of a growing number of young companies that have set out to achieve more than just building the next unicorn. They want to do the world a service, advance society and make the economy more sustainable. And they want to do this with the help of complex technologies that are on the verge of a breakthrough - that today are still in the lab, but tomorrow will be on the market.

What is deep tech?

This trend, which has gained enormous momentum, is called deep tech. While just 700 million euro in start-up capital flowed into this sector in Europe in 2010, this figure was almost ten billion in 2019, reports the investment portal Dealroom (PDF). Management consultant BCG estimates that globally, investments of more than 60 billion US dollars (about 50 billion euro) were pumped into deep tech start-ups last year.

The term deep tech is elastic, encompassing biotech and artificial intelligence as well as materials research, nanotechnology, drones, robotics, fusion reactors and quantum computers. The common denominator, however, is that it is always rooted in science, and focuses on "impact" instead of influencers and on future technologies that push the limits of what is possible. Development takes time, the founders require a lot of money - and investors must have enough courage to take the risks involved.

"Deep tech companies typically center on an innovative technology that features significant advances compared to existing solutions on the market," explains Mariam Kremer, who specializes in this industry at London-based impact investor Lightrock (a sister company of LGT). "They are creating new markets, and bringing these technologies from the lab to the market requires a significant amount of capital."

Creating the first prototype can cost 200,000 euro, or even one or two million euro. "That makes it difficult, naturally," says Kremer. "In e-commerce, you can develop prototypes using an app."

An investment with "copy protection"

On the flipside, the possibility of reaping a much greater reward for the willingness to take risks is attractive in the event of success. Because the products are based on years of research, the developers' intellectual property is usually well protected - whether by patents or because latecomers lack the know-how to bring competing products to market swiftly. "That's a sustainable and structural competitive advantage, of course," Kremer says.

More and more frequently, investors are also looking to finance companies that not only increase the prosperity of shareholders, but also advance society as a whole. The market for investments that are considered sustainable because they follow so-called ESG guidelines is estimated at 38 trillion US dollars worldwide: a figure that corresponds to the combined gross national product of the US, China and Japan.

Company founders working on socially relevant challenges have an increased chance of receiving seed capital - even if it takes them years to reach their goal. This is the case for the team at the Swiss company Synhelion. Their technology, which is based on projects conducted at ETH Zurich, uses sunlight to produce synthetic fuels. As part of this process, CO₂ is removed from the atmosphere, making the fuels climate neutral.

This was achieved for the first time in a lab in 2010. Since its founding in 2016, the company has focused on getting the idea ready to go to market: "In recent years, we have scaled up the key components to industrial levels," says Chief Technology Officer Philipp Furler. This summer, his company plans to test production on DLR's solar tower in Jülich, near Aachen. If all goes well, a plant capable of producing 10 000 liters of fuel per year should follow in 2022. "That's enough to fuel a few small planes," says Furler. Laughing, he adds that this is not yet enough to change the world.

But the Swiss company has ambitious goals. By 2040, Synhelion wants to be able to produce 40 million metric tons of fuel. That would cover more than half of Europe's demand for kerosene - and help businesses meet their climate targets. "The market is huge," says Furler. "Political and societal pressure is also increasing. People understand that these solutions are necessary." And smart investors also understand "that you can't change the world in a day, but you can change it with hard work over years."

The next wave of innovation after digitalization?

Many observers agree that deep tech is the next wave of innovation. Some forms of deep tech are already present in our everyday lives - for example, artificial intelligence, robotics or drones - while others, such as lab-grown meat, solid-state batteries and quantum computers, will likely take a few more years. Taken as a whole, however, the impact of these technologies on the economy and society will be similar to that of the digital revolution, or the industrial revolution before it.

"We have the opportunity to fundamentally reshape the world," says Massimo Portincaso, Chairman of Hello Tomorrow, an organization that specializes in deep tech. For the former BCG consultant, "it's like coming full circle." The Industrial Revolution, he explains, was based primarily on exploiting natural resources - extracting oil, gas and coal; breaking down raw materials so they could be processed into products using lots of energy.

Then came the digital revolution, which created value through bits and bytes. And now, Portincaso says, new processes such as 3D printing, synthetic biology and nanotechnology allow us to work at the level of individual molecules. "We can go from the small to the big."

This turns the fundamental principle behind industrial production on its head. And in consequence, is "comparable to the change that took place when society shifted from hunting and gathering to agriculture," explains Portincaso. "To date, we have been a society that hunts for resources. And now we're becoming farmers at the atomic level. Instead of being agricultural farmers, we are atom farmers."

Can Europe catch up?

For Europe, which has traditionally been strong in research, this presents a new opportunity to be at the forefront of shaping the future. "The opportunity is there, unlike in the case of the digital transformation, where Europe completely missed the boat," says Portincaso. However, the continent needs to step up, he adds. According to Hello Tomorrow's Chairman, Europe still lacks a strong ecosystem for innovation, and also sees a need to catch up in terms of venture capital.

Lightrock expert Mariam Kremer is more optimistic. "The US and China may be further ahead," she admits, but nowhere is the number of deep-tech investments growing as rapidly as in Europe. There has also been a clear rise in expertise in this area: "We are seeing that VCs now want to hire more engineers, not just finance experts," she says. Those who wish to succeed require a deep understanding of the technology in order to be able to assess the risk, because pure market analysis is no longer enough.

Lightrock has also invested in the high-flyers from Munich. "Lilium has the potential to increase the sustainability of travel in and between cities, as well as improve the connectivity and quality of life of consumers. For us, Lilium is an impact solution because it reduces CO2, traffic volumes and costs," explains Kremer. This fits perfectly with the company’s approach to investing in start-ups "that have a positive economic, social and environmental impact."

In a next step, Lilium is planning an IPO on the Nasdaq, with a valuation of 3.3 billion US dollars. But CEO Daniel Wiegand says that money is not a key driver for him: "If you ask what motivates me," he explains, "it is first and foremost the company’s purpose: am I doing something meaningful? For the world, for society?"

Wiegand counters skeptics who doubt the viability of air taxis (link in German) with the many advantages that this innovative concept offers: an electric jet that can take off and land vertically is "actually the most environmentally friendly means of transport," the engineer explains. "Because it's emissions-free, very fast and efficient, and it doesn't need any infrastructure on the ground other than the take-off and landing pad."

Unlike many of its competitors, Lilium’s aim is not to fly within cities or carry passengers on demand: both are too inefficient, explains Wiegand. Instead, the Munich-based company wants to use the shuttle principle to serve cities that do not yet have adequate connections. The costs should initially be around two euro per kilometer flown, says Wiegand, "similar to a cab on the ground," and later drop to 50 cents. "In the medium term, we expect to reach the same price per kilometer as for a privately-owned car."

This is another one of those ambitious goals that can only be achieved with deep tech: part of the equation is the expectation that artificial intelligence will enable autonomous flying in the foreseeable future. "When you no longer need the pilot," Wiegand says, "30 percent of the costs are eliminated."

Header visual © Lilium.