High-tech is a risky business – it’s no coincidence that the funds which invest in it are called “venture capital.” But there are funds which take that risk up a level and invest in future technology, the kind that may one day develop into a business, or may not. In the industry it’s known as “deep-tech.”
How do you define it? One player in the sector compares it to the famous definition of pornography made by U.S. Supreme Court Justice Potter Stewart: “I know it when I see it.”
A more conventional definition comes from Wikipedia: “Start-up companies are based on substantial scientific advances and high-tech engineering innovation. They require lengthy research and development, may take a long time to reach commercial application, and often require large investments to achieve commercial success.”
The sector relies on intellectual property that is hard to replicate, which gives the startups that have it an in time to market and makes it difficult for competitors to emerge.
The companies that are successful can count on not only being the first but perhaps the only one with the technology they’ve developed for some time to come. On the other hand, the risk is enormous as to the potential profits.
Deep-tech startups are usually operating outside the usual software solutions of the high-tech industry. They tend to specialize in semiconductors, communications, robotics, life sciences and digital health, 3D printing, advanced materials and quantum computing.
“It’s true that deep-tech is historically connected with chips and hardware, but software can also be significantly deep technology,” said Maya Pizov, a general partner in the Amiti Ventures fund, an investor in early-stage deep-tech startups. “In the area of artificial intelligence and machine learning there are a lot of companies that use ‘off-the-shelf’ algorithms. But as deep-tech investors, we are looking for those who are building their own algorithmic models.”
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She says that as a rule, deep-tech is multidisciplinary, involving a mix of software and hardware, She points to Innoviz, an autonomous-driving startup in Amiti’s portfolio, which joins optics and machine vision.
Innoviz, which has raised $252 million to date, is developing high-performance, solid-state LIDAR sensors and perception software for the automobile industry. The company was formed in 2016 but its first product won’t likely be onboard cars until next year – a long time-to-market by tech industry standards.
“Combining disciplines increases risk, but it also enables us to develop a meaningful solution,” Pizov said.
Deep-tech is at an all-time peak in Israel. IVC Research Center, which tracks the high-tech industry, estimates there are 150 local startups in the field, not counting those in life sciences. Last year they conducted 68 funding rounds raising a combined $1.8 billion, almost twice as much as they did in either 2018 or 2017.
According to IVC, the biggest fundraiser in 2019 was by DriveNets, which says its Network Cloud product offers an alternative to the computer networking architecture of the last 20 years and raised $117 million. Fabric, a robotics startup, nabbed $110 million and Vayyar, a semiconductor company, raised $109 million.
Not surprisingly, few VC funds consider themselves deep-tech specialists; rather they invest in it opportunistically. Grove Ventures is one of the few specialists.
“On the most generic level, there are companies whose technology is their foundation. It’s what will create significant added value for its shareholders, its employees and the world,” explained partner Omri Green. “If someone sets up an e-commerce company, the technology is not what’s important but the marketing and the user interface. Deep-tech demands deep research and development and a lot of money, but you can’t create new markets.”
Green offers the following example with the Grove portfolio company Wiliot, which makes semiconductors that harness ambient nanowatts of electromagnetic energy from cellular, WiFi and Bluetooth networks to work without batteries or wired power sources.
“Scores of the best engineers [are working] to create a chip that uses very little energy. This is what could one day make the company a giant because if you make a telephone chip, you’re limited to the number of telephones there are in the world. If you make a chip for cars, you’re limited to the number of cars in the world. Wiliot’s chip can be put into a box. The entire world of the internet of things, which today is limited by the need to replace batteries, is suddenly getting a solution that could enable billions of chips to be installed,” he explained.
What caused Grove to focus on deep-tech?
“We looked at the achievement of Israeli high-tech. There are a lot of amazing achievements that aren’t in deep-tech and we don’t disparage them. But we looked especially at Check Point, Solar Edge, Mazor Robotics, Mobileye and M Systems [all pioneering Israel tech companies, the last led by Grove founder Dov Moran] and we realized that it was these kinds of companies that want to build.
“If you look decades back, there have always been technologies that created a new technology infrastructure, like the transistor or microprocessor. We’re looking for the next building blocks. It could be AI, quantum computing and internet of things.”
What’s so bad about taking a software company and bringing it to a $2 billion valuation in a few years?
“When I ask myself what is special in Israel, it’s the knowledge we have in image processing, hardware and chips. Look what happened in chips: Intel bought Habana Labs. Amazon bought Annapurna. Broadcom made nine acquisitions. Dune Networks generates three times the revenue every year that it paid for the company with just 300 employees working in Yakum”
Besides Amiti and Grove and a handful of other players, there are almost no other deep-tech specialists. But there are angels, or private investors, such as Avigdor Willenz and Zohar Zisapel.
Zisapel, who is regarded as one of the founding fathers of Israeli high-tech, said there’s a logic behind the risk investments like deep-tech. He reasons that in any area where the barriers to entry are low, they are in fact high because there is so much competition.
“I don’t believe in investing in things that are seemingly easy, easy to reach the market. If it takes little time to reach the sales stage, it’s a sign that you’re not building something significant. Competitors won’t have a problem doing the same thing and push you out of the market, Deep-technology, from my point of view, is like a moat. I’m a tech guy and I feel at home creating my advantage there.
Zisapel recalled Babylon, a company he invested in years ago. At a certain stage it decided to give away its online dictionary for free by turning it into a toolbar with advertising. But Google terminated its agreement with the company in 2013 and Babylon almost entirely disappeared.
“There are companies in the internet that make their money from advertising, but you’re sitting on Google’s tail. It wags it a little and you’re dead,” he said.
“There are investments I’ve made that I would call romantic investments – companies that help humanity – rather than just developing another modem,” he said. In this context, he has invested in several medical technology companies founded by Dr. Eyal Orion.
“In the area of medicine I’m no expert, but he [Orion] is,” said Zisapel. “These are things that aim to help the sick. By the way, also in medicine, if you’ve really developed something new and you clear the regulatory and approvals obstacles, you can have a significant competitive edge over time. I’ve had opportunities to invest in internet gambling and porn, but I don’t touch those things. Not cyberhacking either. I don’t want to do negative things.”
Corporate capital, too
Another source of deep-tech investing is corporate venture capital. Big companies are less interested in ensuring a return on their investment than they are in getting early exposure to path-breaking technology. Corporate VCs like Qualcomm Ventures and Robert Bosch Venture Capital have made deep-tech investments in Israel.
From the viewpoint of startups, corporate VCs provide important information about the markets and its needs and can play a key role in validating a new product.
One example is the technology incubator run by Elbit Systems, the Israeli defense company. Its slogan is “dare to go deeper.” It not only invests in deep-tech but in its very early stages.
“We start to look at a technology when it’s in the universities and in many cases we’re there to help build the company,” said Ayelet Ben-Arav, vice president for business development at the company’s Incubit Technology Ventures in Be’er Sheva.
The incubator model calls for initial investment of $1 million per company, 85% of which is covered by the government’s Israel Innovation Authority. “Our intention is to influence companies over the long term – five years and north. We invest money in companies but we do a lot more than that,” she said.
Elbit contributes its expertise in areas of sensors, chemistry and propulsion. “A week ago we met with a company that makes building coatings, which cools them and saves energy. Who can they consult with? We have some people who understand what they are talking about,” Ben-Arav said.
Apart from the experts, Incubit makes available to startups equipment and labs that Elbit has, which is a critical concern when it comes to deep-tech companies.
But Elbit is not interested in exits. Ben-Arav said it will take an equity stake of 30% or more at the start and doesn’t care if its stake is diluted in further funding rounds. “Our interest is in the company growing and succeeding, but our aim is to acquire early knowledge about the technology,” said Oran Gadot, Incubit’s CEO.
In that context, the incubator invests in dual-use technology with both civilian and military applications. One example is EchoCare, which has developed a home-monitoring system for the elderly that automatically provides alerts in emergencies and potential safety hazards.
The same technology could also be used for radar that sees images behind walls, a useful tool in house-to-house fighting.
“We don’t expect the company to develop anything military, we don’t make that requirement,” said Gadot. “We have a process whereby we license the technology and, if it becomes a product, the startup can benefit from royalties on our sales.”