“VC has lost its way. Most VCs want to back a SaaS app that already has good growth and will continue to grow more. They don’t want to take technology risks which is unfortunate. VC started off as Deeptech only. Silicon Valley got its name from semiconductor companies. VC needs to be brought back to its roots.” - Seth Bannon, Fifty Years
In order for a startup to flourish, an ecosystem that encourages entrepreneurship, provides access to resources and, more importantly, nurtures the foundation to pursue innovation is necessary. Silicon Valley is what it is today because it has the highest concentration of access to information, talent and capital. Talented individuals want to be part of such an ecosystem that enables them to build ambitious companies. Ambitious companies attract capital that both scales the company's values and offers a high return on investment opportunities. And the loop continues. Until the tools are developed to democratize all of these. (Hey you! crypto and remote work, looking forward.)
Among the many players in traditional startup ecosystems, venture capital is an industry that serves as fuel to startups. In rather simple words, venture capital refers to capital (modern descriptions usually revolve around money) that has been allocated to a private company. The company, in most cases, is young with an unproven product and hence the capital allocated comes with inherent risks.
Capitalism, as we think of it today, arose mainly from trade that involved the production of goods and sales of services that extended beyond geographical markets and borders. Although there are notions of shared business ventures pointing towards Ancient Rome, capitalism in its modern form seems to have become full-fledged with the rise of Dutch East India Company. Traders came together and established companies that flourished commerce and trade. This enabled the growth of banks and insurances to lend money and mitigate risks. The subsequent growth in economy spurred innovations in shipbuilding and steam engines.
A brief history of Modern Capitalism and Startup culture:
(A quick summary of Capitalism borrowed from the wonderful series written here by Michael Ramos Lynch and Neil Devani.)
Until the early 20th century, only the wealthy were capable of making venture investments. Despite a large number of failures, growth and capital return were on an upward cycle. This spun new management companies that mutually benefitted by gaining access to subsidized investments from the government in the form of loans. An influx of investments and the exponential rate of technological development coincided around the mid 20th century. This era saw an unprecedented innovation in consumer goods, automobiles and telecommunications.
Around the late 20th century, the dot-com era began. Technological advances in computing and internet opened up new possibilities for software startups. Combined with over-the-roof valuations and heavy investments, the new-age entrepreneurship era began. Hundreds of startups came into the picture with most of them going bust in the early 2000s. The companies that survived - Google, Amazon - became the most dominant global companies.
Mobile and Web 2.0 - The introduction of the internet combined with iPhone and Android facilities drove the second half of the software revolution. Applications that enabled people to connect and offer services became rampant. With significant capital costs, and mostly zero marginal costs, this era served opportunities in a golden plate to the VCs.
This also paved the way for a new kind of ecosystem player - Accelerator, incubator or startup launchpad - and the YC era began. An accelerator typically offers an opportunity and a safety net for startups by scaling down the opportunity costs of founders. They provide the founders with a platform to get off the ground and access to networks, guidance and sometimes stipends too. Most startups fail, by design, and the low downside but extreme upside offered by this model spun a plethora of accelerators across the globe.
Each technological revolution of the past required capital, money and extensive research. Each technological revolution went through a bubble of its own that spanned multiple stages:
- Trigger of Innovation
- The peak of Inflated Expectations
- Trough of Disillusionment
- Slope of Enlightenment
- Plateau of Productivity
Gartner Hype Cycle - Tech Bubble
The famous Gartner Hype cycle or Amara's Law holds true for emergent technologies. Although the phrase has become an easy cheat code for consultants, the cycle of technological revolution has held true for almost all technologies and infrastructures of the past. These include the industrial revolution, the era of railways, the age of electricity, the era of oils and the information revolution.
Most of today's emergent technologies, in theory, have existed on paper at least for a couple of decades. And just like the previous technological revolutions, these technologies are bound to have booms and busts. The crypto boom and bust cycle in 2017-18 isn't any different from the dotcom boom and bust of the 2000s. Even though this was a shorter cycle, 95% of the money invested in cryptocurrencies still faded into obscurity.
Deep Tech Ecosystem
The impressive article by Marc Andressen, 'Time to build' speaks about advanced technologies in order to build the world we aspire for. And the technologies to build involve physical infrastructure and hardware besides software. These deep technologies demand heavy funding, lengthy-time to market and strong R&D that come with high technical risks.
Most deep tech startups are nascent and operate in a market that is just emerging. Given the complexity, risk and demand for high resources, a strong ecosystem plays a dominant role in the success of these startups. There are 3 major segments of a deep tech company:
- Research - Comes with advanced knowledge and technical expertise
- Development - Turn the research into a technology that has IP
- Commercialization - Scale the technology to market
There are different players involved in this cycle and each one has a very important role to play:
Source: Different Funds
Research institutions and university incubators form the major backbone of advanced innovations in technology that cames after years of research. They provide the platform that nurtures talent to create IP. Google came from a research project by two PhD students.
Accelerators provide seed investments and access to mentorship. This substantially increases means to product viability for startups. Accelerators also act as a filter and source for institutional investors. There are numerous deep tech dedicated accelerators on the rise across the globe.
Investors provide investments and access to networks to scale-up the products. Investors range from pre-seed- pre-product or pre-idea - to late-stage investments just before going public. There are over 300 Deep Tech dedicated across the globe as catalogued by Hello Tomorrow.
Government agencies play a much more active role in deep tech startup ecosystem compared to the traditional startup ecosystem. Besides investments for research, the regulatory environment should be designed in a way to encourage innovations.
Corporations and established companies, either through initial investments or final acquisitions help deep tech startups enter the market. They enable innovation transfer and technology integration for the products developed by the startups.
Heavy investments have been flowing into deep technologies, although negligible compared to non-emergent technologies, risks and rewards associated are still thinner and higher.
Inadvertently, there will be a lot of deep tech startup failures. A strong ecosystem provides the opportunity for trial and error while offering a safety net and a platform to develop, scale and innovate. And a network of players working together is necessary to build an antifragile ecosystem that will allow innovations to fourish.
- Book: Antifragile- Taleb who sounds like an unbearable person who frequently calls names has a wealth of knowledge hidden underneath the layer. His kickass book Antifragile is about how to gain from disorder and chaos while being protected from fragilities and adverse events. Antifragile is one step beyond, it involves an ecosystem that enables small individual failures but quick rebounds that are meaningful and long-lasting for the entire ecosystem.
- Deep Tech Ecosystem: Hello Tomorrow is a not-for-profit organization that aims to help unlock the power of deep tech to solve our toughest global challenges. They scout for deep tech startups, build collaborative ecosystems and organize summits to connect the ecosystem players. They also organize a global challenge bringing in startups from across the world on one platform.
- Deep Tech Startup: Circularise - One of the drawbacks of the modern-day world of abundance is the complexity involved in tracking the end-to-end impact of every product that caters to an individual’s use. The lack of transparency in the entire supply chain from how the product is sourced to where the product ends up after use makes it difficult for an individual to make conscious and positive choices in the wider framework of sustainability. Circularise aims to circularize the economy by bringing wider transparency to the global supply chain by enabling brands, suppliers and manufacturers to provide end-to-end information about products over an open-source protocol and decentralized network.
- Random Recommendation: Sean Caroll- If you love understanding the basics of physics as explained to a layman, who better to hear it from than one of the most loved scientists of modern times. Check out his youtube series titled - The Biggest ideas in the Universe.