Deep tech and the shock of the new

Why? Well, human nature insists that a period of intrigue and anticipation – relieved eventually by the shock of the new – will have an exponential effect on impact, reaction and, yes, perceived value. It works for start-ups, and it works for multinationals too. Right now, we’re working with some iconic global brands on deep tech breakthroughs that are firmly in stealth mode and intentionally shrouded in secrecy. At launch, the element of surprise will shake the market, and stoke their value.

Historically too, we at CC have seen clients more than double the value of their business, not necessarily on the announcement of their programme, but on the announcement of its first success. They enjoyed a significant boost to their price to earnings ratio, even though they had yet to recoup significant revenue from their investment.

What I’d also say about a deep tech strategy is that it shifts the emphasis to capturing value, rather than simply creating value. Most businesses create value, of course, but the cut and thrust of the competitive market means they only capture a certain percentage of it. A deep tech strategy gives you something that’s so different, so unique and so compelling to customers that you get to keep more of the value for yourself. And why not? You’ve taken the risk, it’s fair you’re rewarded more strongly for doing so.

Novel deep tech solution

My observations do seem to resonate with many of the business contacts I meet. A few weeks ago, I was in Japan chatting to the CEO of a medium sized business. They have about a $4 billion dollar turnover and spend roughly a quarter of a billion a year on R&D. With earnings at only about 4% of the turnover, I asked him a straight question – what was constraining that return? His answer was basically that even larger customers had pushed the company into a commodity position. (Common territory for lots of businesses). He warmed to my suggestion of reviewing his R&D portfolio to help seek out a new market opportunity from a novel deep tech solution that would create dominance and a much higher return.

This example encapsulates the essence of what we do for a living at CC. We focus on capturing value because we’re driven by the ambition of clients who are looking for it. It’s a virtuous circle. Yes, we have the scientists and engineers who can make technology breakthroughs, but we also have business analysts and sector specialists able to identify market opportunities that match a company’s innovation potential.

Another question we tend to ask our clients, and potential clients, is this. “What is it that makes customers choose you?” The crucial point is to always focus on that – rather than the thing that is currently making them money. Nokia’s experience, nearly 20 years ago, is an obvious example. The company made lots of money by selling phones and assumed that would continue. But they lost sight of why people chose them in the first place and when Apple came along, people stopped choosing them. The fact that Nokia could make phones cheaper than anyone else suddenly became redundant.

Strategic deep tech investment

I think this is an important message, and certainly pertinent for anyone considering a strategic deep tech investment. Beware of thinking about simply making familiar things cheaper, faster, better – even though you get good at doing the same thing repeatedly. Ensure that you’re always aware what might change buyer behaviour, what might break that cycle; being ready and willing to innovate, before others do, means a company will remain agile and nimble enough to stay relevant to customers.

I was talking about start-ups earlier, so let me expand a bit more on the value that can be captured when stealth and secrecy hits an unsuspecting market. In its study of Europe’s top 1,000 start-ups, McKinsey found that deep tech start-ups earning unicorn status achieved typical revenue levels of about €8 million. The figures implied a revenue multiple of 100 to 150 times – reflecting the huge promise of future revenues included in deep tech valuations.

With deep tech start-ups enjoying such huge revenue potential and extremely high valuation to investment ratio, it follows that large corporations bringing deep tech innovations to market will have a high share price to earnings ratio. This is where value lies.

What is the difference between tech and deep tech?

This is something people ask me quite regularly. As our ‘tech versus deep tech’ illustration below shows, there are a number of valuable advantages in creating novel solutions that the market has never seen before.

A key point is that adopting a deep tech strategy can produce a negative, knock-on effect to competitors, as this 2023 European Deep Tech Report reveals, the strong technological edge of deep-tech start-ups gives them a defensible ‘moat’. This is a theme CC explored in our own report into quantum technology. In this emerging and transformative era of innovation, those who prevaricate will be left behind. It won’t be easy to play catch up on complex quantum solutions when talent and expertise are scarce.

How to value deep tech companies

But perhaps the most important takeaway from the graphic is the one about being ‘market disrupting and defining’ – which brings me back to value. Successful deep tech driven solutions will rarely, if ever, have to compete with a comparable product in the marketplace because they are solving a big problem in an entirely new way. The fundamental breakthrough will unlock huge market opportunity – or actually create an entirely new market.

And what about legacy value? There’s no doubt that a deep tech strategy can create much more than competitive advantage, economic growth, high value jobs and societal prosperity. Its potential to solve some of our most pressing global challenges – sustainability, health, food and water supply among them – is immense. Ambitious members of the C-suite stand to leave an indelible mark on the fortunes of the planet, as well as their business. Drop me an email and let me know if you’d like to continue this conversation, I’d love to hear from you.