What do we mean when we talk about deep tech?

A conversation with Grove Ventures' managing partner (and the inventor of the USB flash drive) Dov Moran

Deep tech — the generic term for technologies not focused on end-user services that includes artificial intelligence, robotics, blockchain, advanced material science, photonics and electronics, biotech and quantum computing — has been an identified category for investment as long as the tech industry itself.

But as with many other sectors, it has found itself in and out of favor depending on the wider climate. In the years when mainstream tech adoption started to take off, under-the-radar deep tech became even more obscure as big-ticket apps and other services and gadgets popular with consumers received all the limelight.

Now, with “winners” in that bigger category climbing to new heights — it’s hard to imagine anyone replacing Facebook, Google, Apple or Amazon anytime soon, even as other apps grow in niche popularity — the enthusiasm of taking bets on consumer startups has leveled off. Coupled with that, investors are again looking at startups focused on a more diverse set of technologies that solve hard problems, which might prove to be the levers of instrumental change.

Those trends have contributed to a rising interest in deep tech, with investments in the wider category growing 20% annually between 2015 and 2018, culminating in nearly $18 billion of investment, according to a 2019 report from Boston Consulting Group.

One measure of the enthusiasm in the space is the activity of VCs who focus on deep tech. Last month, Tel Aviv-based Grove Ventures, which funds companies spanning Europe and beyond, closed a $125 million fund to back deep-tech startups and is already raising another fund of the same amount. Firms that Grove has backed include fabless IoT semiconductor startup Wiliot, API marketplace RapidAPI, autonomous vehicle startup TriEye, next-generation manufacturing startup 3DSignals and a number of startups still in stealth.

We talked to Dov Moran, a managing partner at Grove, about what he’s seeing as some of the big trends in the space, how that plays out in terms of investment opportunities and how startups in deep tech can best connect with investors and (following on from that) revenue.

Moran is speaking from an interesting vantage point. As an entrepreneur, he invented the USB flash drive, arguably paving the way for a number of subsequent innovations in storage, smaller computing devices and more. He also has deep experience in semiconductors and how to convert deep tech ideas into deep tech business, which is not always an easy thing to do.

“We know the frustrations you can have at the early stage with deep tech,” Moran said.

The interview is edited for length and clarity.

TechCrunch: “Deep tech” has become a more common phrase in the last couple of years, and now it means a lot of different things. What do you see as the biggest opportunities in deep tech right now?

Dov Moran: I do believe that AI is going to change a lot of different industries, and that will include deep tech, but I also think we will have to see what happens after AI. I think digital health and the continued development of industry 4.0, which includes making machines smarter, smart cities, IoT, is an important area, as are smart materials and space. Most industry 4.0 startups get investment from financial institutions and strategics, which helps because it means the startups can talk to potential customers very early.

Some of the developments we’ve seen in industry 4.0 I would have thought of more as enterprise tech. What do you see as the difference between the two?

Deep tech at its core is being built by engineers, PhDs and sometimes academics. They are building things that are very difficult to replicate. The rest are things that talented guys who have lots of know-how can do, but it’s not unique. Facebook is great, but it’s not deep tech. We will not invest in the next Facebook, we will not invest in the next social for enterprise, and no fintech. These are great areas, but they are for other investors, not us.

How risky is it to invest in deep tech? Have you modeled whether it’s more or less of a risk than other tech categories?

We are a fund, we are not guys who are funding companies as a charity. We have an obligation to make money for our LPs and we do believe we will. But if you are looking to avoid risk, don’t invest in technology. Do something else where you get a 3%, 5% or 12% return. But even if it’s risky in the overall picture, we will do very well as a fund because when you take a large risk you will also see a big return. The companies that we invest in we think we can make more than 10-20x.

But it’s a long-term concept. When we raised money for our earlier funds we said we would invest in things that would take time. But what happened in the first fund was that we saw half of the companies in the portfolio raise again at a much higher valuation. RapidAPI, for example, is maybe less typical for us but growing very fast and unique. Another company in our portfolio, Wiliot, is making a chip that works without drawing power and it’s going to change the world. It’s not a two-year exit, it’s five or seven, or more.

It will take time, but they will deliver to customers this year and I believe they’re heading toward a billion-dollar valuation. There is also a healthy market today for deep tech startups where they can be acquired ahead of an IPO. That also helps our LPs see the return on investment. But again, my statement to our LPs has been this: If you are looking for a fast return, there are many great funds. But it was easy for us to raise for this second fund.

Have you had any exits yet?

No exits yet, but if you look right now, the follow-on investments in our portfolio companies are coming from several of the world’s biggest tech companies: Samsung, Alibaba, Amazon, Microsoft and Intel. When companies like these invest, clearly it’s highly interesting for them and means great potential for an exit. And we do believe that will see exits.

Who are the typical acquirers of deep tech startups?

Clearly if I mentioned some names, some would be buyers because the tech is highly interesting for them. What’s interesting is that some of the younger founders do push for a fast exit, but we try to encourage the opposite: we believe in long-term value. When [they] are younger and there is a lot of interest and believe that their future is in being acquired by one of those companies. There are others that I believe will go all the way to an IPO. For example if you look at Wiliot, established by an experienced entrepreneur [Tal Tamir, who founded two other companies, respectively sold to Synaptics and Qualcomm], there is a chance they could go all the way to an IPO.

Potential acquirers of deep tech startups in our portfolio include those that are building components of systems for space technology, and companies in the construction space and looking at building materials. The main idea is that we are not talking about typical enterprise companies, although it doesn’t mean we won’t have one or two.

You mentioned earlier that you’re seeing your portfolio companies raise at higher valuations in subsequent rounds, but generally how is the climate for deep tech raising growth rounds? Are there challenges there that are leading to earlier exits?

We do see amazing demand and willingness to invest in our portfolio companies in follow-on rounds, so no. We happen to think it’s easy for them because they are very interesting, and once you can show you can execute on a strategy, the value goes up significantly. Investors and customers are hungry for innovation.

The smartest startups and investors in deep tech are not following what appear to be the most obvious trends, and they are not coming from the most obvious starting points. For example, we now see AI companies working on ways to identify antibodies for viruses. If I told you about that three months ago, you might ask, “who needs that?” Now we all do. I do believe in the future you will see innovation for specific problems coming from a variety of areas, including AI, hardware and software.