PRODUCED IN PARTNERSHIP WITH SPECIAL NOTE www.ifc.org/thoughtleadership SPECIAL NOTE 1 • OCT 2021 Financing Deep Tech By Anastasia Nedayvoda, Fannie Delavelle, Hoi Ying So, Lana Graf, Louise Taupin Deep tech companies—those built on advances in biotechnology, robotics, electronics, artificial intelligence, and other advanced technologies—aim to solve complex social and environmental challenges. Today the majority of deep tech companies are being launched in developed countries, yet the solutions they can provide are applicable globally. Many of these solutions are especially critical to emerging markets, as the intractable challenges of climate, health, and connectivity, among other issues, disproportionately affect these nations. Addressing these challenges is a strategic priority for development finance institutions and governments worldwide, so financing deep tech companies and boosting deep tech ecosystems in order to deliver new solutions globally is a pressing matter. Doing so, however, requires substantial capital and carries a higher degree of risk than ordinary venture investments. This note examines the process of financing a deep tech company, including the benefits and drawbacks of currently available types of financing, and suggests examples of promising but not yet widespread alternatives. Deep Tech Financing Challenges BOX 1 What is Deep Tech? Over the last few years deep tech has been gaining Deep tech is a term for technologies that are based on momentum. Deep tech companies are attracting record scientific or engineering breakthroughs and have the venture capital (VC) investments, and the trend is accelerating: potential to be commercialized. These technologies $76.7 billion was invested across approximately 5,000 include artificial intelligence (AI) and machine transactions in 2020, and nearly $78 billion has been invested learning (ML), materials, advanced manufacturing, biotechnology and nanotechnology, drones and across some 4,000 transactions worldwide over the first 8 robotics, photonics and electronics, cleantech, months of 2021.1 While more funding than ever is being spacetech, and life sciences.* Deep tech companies allocated to deep tech, these numbers represent only around are research and development (R&D) intensive and one-fourth of all VC investments in 2021, a relatively low multidisciplinary. proportion given that deep tech companies tend to be more Source: IFC. For more information see EM Compass Note 94, Deep Tech Solutions for Emerging Markets, November 2020. capital intensive than other start-ups. 2 * Life sciences start-ups are often counted separately from the rest of deep tech companies, as biotech and pharmaceuticals have an established path to Financing deep tech start-ups is different from traditional commercialization, unlike most other areas of deep tech. venture financing, as deep tech entrepreneurs need to About the Authors Anastasia Nedayvoda, Investment Analyst, Upstream Global Infrastructure, IFC. anedayvoda@ifc.org Fannie Delavelle, Manager for Europe, EuroQuity – International and European Affairs Department, Bpifrance. Fannie.delavelle@bpifrance.fr Hoi Ying So, Manager, Disruptive Technologies and Funds, IFC Lana Graf, Principal Industry Specialist, Disruptive Technologies and Funds; IFC Louise Taupin, Researcher, Deep Tech Department, Bpifrance. 1 This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group. Financing of technological research and search for viable economic model continue across stages Technology First Commercial Scale-up/Exit Identifying the Finding Product- Early Validation/ Contracts & Technology and Mergers & Technology Market Fit Commercialization First Pilot Improvements Acquisitions University-Affiliated Programs Government Programs Blended Finance Accelerators Corporate Venture Capital & Corporate Partnerships Traditional Venture Capital Funds Alternative Fund Structures (e.g., Evergreen Funds) Venture Debt Institutional Investors High-Net-Worth Individuals Project Finance (Credit Funds, Partnerships) Acquisitions IPOs SPACs FIGURE 1 Stages of Financing Deep Technology Source: IFC and Bpifrance. navigate competing priorities and timelines (Figure 1). a progressive validation of technological building blocks to To best understand the financial instruments available for open new development paths and potential applications, and deep tech start-ups, it is useful to deconstruct the process these cannot be known in advance because they depend on of financing deep tech and examine the financing options the emergence of the technology and on the creation of new available for a deep tech entrepreneur at each stage of the customer demand for a brand-new technology. company’s development. Thus, for deep tech companies, arriving at a fully-fledged solution Traditional funding models and cycles often fail to meet and deploying it outside of the lab requires years of development, the unique needs of deep tech start-ups, as these companies often requiring access to specialized R&D assets such as generally don’t follow a linear venture stage investing process. laboratories, as well as costly infrastructure and hardware. For The approach chosen for this Note, therefore, relies on a example, developing holograms for commercial communication mapping of financial instruments in development stages requires more time and money than creating an e-commerce rather than in traditional funding rounds This new approach app. The longer timeframe and higher risk of failure make it encourages investors and other deep tech stakeholders to challenging for pre-seed deep tech start-ups to obtain funding.3 consider deep tech investments as financing a solution to a For this reason, initial financing for deep tech often comes in global challenge, rather than financing an individual project. the form of non-dilutive funding from university-affiliated or It does so by reinforcing the importance of ecosystem-building government programs. A track record of non-dilutive funding and goal-orientation in the financing of deep tech. The sections is indicative of a new technology’s relevance to strategic that follow identify and explain these development stages. business needs or national strategic priorities and can signal Identifying the Technology technical competence to private investors at later stages.4 A deep tech company starts with technological research aimed University-affiliated programs are usually a part of a university’s at commercializing a known scientific discovery. At this stage technology transfer office (TTO), although sometimes they the entrepreneur is focused on identifying the technology function as an independent entity.5 Such programs provide that is worth validating further. This exploration is driven by entrepreneurs with access to lab facilities and a network of 2 This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group. industry experts. The program terms vary by country, with Adapting government programs to fill this need for continuous TTOs in the United States and Israel often providing assistance support from technology identification to scale-up will be key and grants to start-ups,6 while many TTOs in Europe take a to boosting deep tech ecosystems. In Europe, the European larger equity stake in a start-up in exchange for their services.7 Innovation Council (EIC)10 budgeted over €10 billion for 2021–2027 to develop and expand breakthrough innovations. Government programs allocating funds for deep tech are Its model combines research on emerging technologies with an aligned with national technology strategies or industry-specific accelerator program and a dedicated equity fund (€3 billion) to development plans. Governments play a major role in enabling scale up innovative start-ups and small and medium enterprises deep tech at the pre-seed funding stage. For example, the U.S. (SMEs). Similarly, French investment bank Bpifrance’s Plan government is currently the world’s biggest deep tech investor, Deeptech was also built to meet the needs of deep tech start-ups. through funding of R&D in universities and laboratories as well as through grant programs such as those of the Small Launched in 2019 with a €2.5 billion budget over five years, Business Innovation Research (SBIR) program. Plan Deeptech’s goal is to encourage the creation and growth of French deep tech start-ups, and to boost innovation However, direct government grants for deep tech R&D have ecosystems through its Les Deeptech Community. Plan been inconsistent. Globally, the number of grants rose from Deeptech focuses on three priority areas with high social 2,200 in 2013 to 3,200 by 2015, falling back to 1,500 in and environmental value: Greentech, Health, and Industry of 2018. Dollar volume increased from $4.5 billion globally in the Future. In 2020 alone, 400 deep tech start-ups benefited 2013 to $6.1 billion in 2015, but fell to $4.7 billion in 2018.8 from €220 million in innovation funding through grants and Moreover, many start-ups do not survive long enough to repayable advances; 270 of them also received coaching and complete the process of obtaining non-dilutive funding from tailored diagnostics. In addition, close to €870 million was such programs, and once public funding winds down, deep injected into the ecosystem through investments in funds. tech companies often remain months or years away from being Other governments and government-affiliated organizations able to attract private investors. around the world are enabling deep tech through partnerships with the private sector, such as in India where the Ministry of BOX 2Deep Tech and the Sustainable Electronics & Information Technology (MeitY) has partnered Development Goals with accelerator programs to roll out national support to deep Achieving the Sustainable Development Goals tech companies.11 Moscow-based Skolkovo Innovation Center, (SDGs) is a strategic priority for development finance a nonprofit that enables the growth of deep tech start-ups, institutions and governments worldwide. partners with key Russian and international corporations In 2021 IFC invested in The Engine, an early-stage in deep tech verticals (e.g., clean energy) to launch industry- deep tech fund based in Boston, which is backed by the Massachusetts Institute of Technology, Harvard specific accelerators.12 University, and the University of California. IFC is Blended finance products are a helpful de-risking tool working with the fund’s management team to enable at the pre-seed investment stage and beyond. Blended The Engine’s portfolio companies to accelerate the adoption of their solutions in relevant emerging products include grants in combination with automatic or markets that would most benefit from these conditional equity financing, a suitable way to boost the breakthrough technologies. funding available early on and mobilize large amounts of For example, Boston Metal has invented a coal-free, growth capital at later stages. Blended products have been emissions-free, modular method of industrial steel instrumental in mobilizing private financing to help solve production using electricity. Lilac Solutions enables difficult global challenges such as clean energy transition the increase in lithium supply needed for electric vehicles by commercializing a new lithium exchange (one third of blended finance deals target UN Sustainable technology for lithium extraction from brine resources Development Goal 7: Affordable and Clean Energy13). that is significantly faster, cheaper, and more scalable. The public funding portion of blended products is typically E25Bio has developed a rapid, at-home fever panel that sourced from government-affiliated donors, philanthropic diagnoses mosquito-borne illnesses in minutes, not days, with a simple blood test, enabling potentially foundations, or high-net-worth individuals. For example, life-saving treatment. And by analyzing urine and stool the European Innovation Council’s Accelerator program’s collected in sewers, Biobot Analytics makes it possible blended finance option includes a maximum grant of up to to detect the signs of a pandemic before a community €2.5 million and equity investment of up to €15 million. exhibits symptoms, enabling protective measures to prevent the spread of the disease.9 Another example is Activate, a nonprofit supported by the U.S. Department of Energy as part of its Berkeley Lab. 3 This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group. Activate is developing a dual fund structure, which includes a philanthropic-only fund providing recoverable grants and There is a gap in the interconnections between a fund capitalized by its limited partnerships, corporations, players in the deep tech ecosystem, especially between pensions, and endowments.14 Similarly, in July 2021 the innovators and investors. Removing or reducing U.K. government launched a program to make equity co- information barriers around deep tech investments investments with private sector investors in growth stage through tools such as Bpifrance’s EuroQuity platform R&D-intensive companies.15 is a first and necessary step to boost the development of successful deep tech companies. Finding Product-Market Fit and Designing a —Isabelle Bébéar, Director of International & Customer Model European Affairs, Bpifrance Every digital start-up must simultaneously envision both its product and its potential customer as it develops the firm that operates early-stage start-up development programs, technology. For deep tech start-ups, the challenge lies in the backs several deep tech accelerators with various focus areas. ability to conduct technical and market design at the same IndieBio is one of them, focused on early-stage biotech, while time, considering the longer timeframe needed to develop the HAX (Hard Tech) covers industry 4.0, enterprise solutions, technology and then figuring out the right unit economics and robotics, and medical and consumer devices. In India, nonprofit revenue model to enable commercialization and scaling.16 Biotechnology Industry Research Assistance Council (BIRAC) Governments and academia power much research but they allocates funding to biotech incubators across the country to lack support to move ventures from grant to funding and ensure equal access to funding for promising biotech start-ups scaling.17 Finding product-market fit is often challenging for via its LEAP fund.19 deep tech start-ups as they are more technology-driven than Online matchmaking platforms can also make a difference in market-driven. Founders from academic backgrounds may connecting start-ups to the right partners and investors. For have limited experience interacting with end users such as example, the EuroQuity platform 20 owned by Bpifrance has consumers or business, and may be tempted to overly focus on become a reference for connecting high-potential start-ups the technology rather than on the strategy to get it to market. at all stages of their development with investors and business Conversely, some deep tech entrepreneurs may be tempted to partners across borders in Europe, Africa, and beyond. More hyper-customize their products. In such cases, they tend to than 30 percent of companies that participated in its programs focus solely on the expectations of a single customer, making in 2020 and 2021 raised funds, and 70 percent of the ones it more difficult to ensure the adaptability of the technology to that didn’t are in discussion stages. other customers. Spreading lessons learned from one industry Validating the Technology and Conducting a Pilot to others should be encouraged by funders at this stage of in the Field a company’s development. Moreover, the pandemic and the Once a technology has been tested in the lab and the first effects of climate change are leading to increasing government go-to-market strategy has been developed, a pilot has commitments to accelerate the commercialization of some to be conducted to test it in real market conditions. One technologies, which is also driven by investor appetite among financing option for deep tech at this stage is to engage in financial institutions and corporations. corporate partnerships or raise funding from a Corporate Start-up accelerators with strong ties to scientific and Venture Capital (CVC) fund. Such investments in deep technology communities and to specific industries are a key tech have been on the rise for the last five years, notably as source of funding for deep tech companies looking for product- corporations have been restructuring their R&D strategies market fit. Many accelerators are private. For example Y from internal development of new technologies to identifying Combinator (YC), a U.S.-based start-up accelerator best known and supporting external entities, effectively outsourcing for producing a number of software unicorns, has been working innovation. 21 Corporate partnerships are usually limited to with deep tech companies and has dedicated biotech cohorts. testing the technology in the commercial environment of the YC’s pitch to founders focuses on go-to-market strategy and parent company while CVC funds offer operational capital long-term planning mentality.18 Paris-based Agoranov is a and testing/pilot partnerships in exchange for an equity stake. public incubator that relies on a well-established ecosystem of Traditional investors see corporate involvement as supporting experts to support start-ups in designing their customer models. the technology de-risking, as they are directly involved with Some VC firms indirectly support start-ups at this stage by pilot and demonstration phases of projects, and as CVCs may backing accelerator programs. For example, SOSV, a global have more in-house technical expertise. 4 This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group. An example of a successful corporate partnership leading out to achieve. For example, Commonwealth Fusion to an investment by a CVC is between China-based self- Systems, a start-up building a compact thermonuclear driving car start-up Pony.ai and Japanese automaker fusion power plan, is raising Series G funds and is Toyota in 2019. The goal was to pilot Pony.ai’s driving still pre-revenue. However, there is a trend toward the system on public Beijing and Shanghai roads to accelerate acceleration of development timelines. 24 the development and deployment of autonomous vehicles. • Second, this timeline challenge is compounded by In 2021, Pony.ai received a $400 million investment from the “double unknown” stemming from the inherent Toyota to speed up the commercialization process of a self- technical and market innovativeness of deep tech. That driving technology. 22 is, deep tech solutions require a simultaneous technology Corporate partnerships can also provide support through validation and search for product-market fit to even technological co-development. For instance, French begin to develop breakthrough disruptive technologies. multinational Thales, which designs and builds electrical This means that the metrics used by investors, which systems, created an acceleration program for cybersecurity are typically based on quantitative indicators such as start-ups. During this six-month program, Thales offers revenue or proof of traction, can’t be applied to deep tech start-ups access to its markets in every sector (aerospace, as there is no clear path to commercialization for most space, ground transportation, defense, and security), free of of these technologies. In addition, deep tech companies charge and without compensation such as equity holding. tend to represent a higher credit risk than other start- ups because their assets are intangible (e.g., intellectual Corporate venture studios also help alleviate some of the property) and difficult to value, especially pre-revenue. risks associated with deep tech. BP’s Launchpad, a studio Traditionally, VC investors rely on a set of standard that sits alongside BP’s VC unit, has a goal of building five metrics such as revenue growth, customer acquisition billion-dollar businesses to tackle the dual energy challenge cost, or burn rate when evaluating a company, yet deep by 2025. Corporations have many advantages beyond their tech start-ups typically cannot offer this data to potential capital and hard assets, including soft assets like established investors until later stages. brands, data customer relationships, industry partnerships, and captive customer bases. Corporate funding, however, is limited and unevenly allocated between deep tech BOX 3 Alternative Fund Structures verticals. Moreover, rigid corporate processes can also stifle Some VC funds have been experimenting with structures innovation. In addition, corporate partnerships sometimes that can better address the needs and challenges of deep have limited tolerance for uncertainty, risk, and failure, and tech financing. Sidewalk Infrastructure Partners (SIP) an inability to move quickly. adopted one such alternative fund structure. SIP makes long-term investments in deep tech verticals such as While venture capital is a key source of funding for start-ups energy, transport, and wireless communications, and at this stage, the amount of capital available for early-stage is structured as an infrastructure holding company. deep tech companies is limited due to: i) the small number of It is set up to invest over a longer timeline, with only two institutional limited partners. The holding specialized deep tech VC funds and the fact that they invest company structure affords SIP a greater degree of in a small number of start-ups due to smaller fund sizes— flexibility, allowing it to both acquire assets and invest only about one-fifth of U.S.-based VC funds are larger than strategically in start-ups that complement those assets. $100 million, 23 and ii) barriers for generalist VCs to invest Evergreen funds also solve the long runway-to- in deep tech, particularly in emerging markets, notably as a commercialization challenge and allow for an expanded investment horizon while aligning result of a lack of in-house qualified experts. incentives between LPs, GPs, and deep tech founders. Several factors currently discourage VCs from investing in 2050, a new evergreen European fund focused on deep tech until after they receive their first contract. climate, plans to periodically open up liquidity distribution windows to allow existing investors to • Development timelines for deep tech are less predictable sell their positions. 25 Breakthrough Energy Ventures than for other start-ups. On the technological side, adopted a 20-year investment horizon. 26 In deep tech, deep tech solutions often require three or more alternative structures with long investment horizons (such as 20 years) have significant potential, as deep key technological components to work together tech funds can allow for secondary markets, given the simultaneously. This means that a VC investing in a multiple stakeholders, high valuation of companies, deep tech start-up early on may need to wait longer and global coverage. to be able to reach the target revenue levels it sets 5 This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group. Receiving First Commercial Contracts and Improving size tends to be smaller than in the United States or Asia. the Technology Encouraging co-investments between VCs is one avenue to After the entrepreneur successfully concludes the pilot, she increase funding for deep tech while reducing risk. or he may need to marginally improve the technology and Blended finance, as a de-risking tool, can be leveraged at lock in the first commercial contracts while fine-tuning unit this stage too. For example, Breakthrough Energy Ventures’ economics or the revenue model. Often, first contracts may Breakthrough Catalyst raises capital from philanthropists, be negotiated on a subscription model, making delivery of governments, and companies looking for ways to transition to capital-intensive products difficult for the start-up. These cleaner business models and uses a blended financing facility minor improvements and operational expenses are often not to make the large capital investments and help businesses accounted for when considering the milestones for raising a negotiate agreements with suppliers by buying down any follow-on round of fundraising. remaining extra cost associated with the clean product.30 Venture debt financing is a critical source of funding for Additionally, over the last two years, a number of government- start-ups that do not yet have positive cash flows or significant backed funds focused on scientific scale-ups have been assets to use as collateral. Venture debt is a loan available to introduced across Europe. For example, the French government companies that have previously raised capital, and it is a flexible created a €6 billion fund in 2020, supplied by institutional instrument that allows early-stage companies to complement investors, to finance the best “French Tech” start-ups over the equity they’ve raised, extend cash runway, and achieve certain performance milestones ahead of the next equity raise. The instrument has been used mostly for biotech investments, BOX 4The Role of Governments in Building yet it is now being explored in other CAPEX-heavy industries Deep Tech Ecosystems such as spacetech, with D-Orbit securing a $17.8m venture loan Governments can play a critical role in facilitating the from the European Investment Bank (EIB).27 development of deep tech start-ups with the potential to have a large positive social and environmental impact. Additionally, venture debt provides institutional investors On the fundraising side they can provide a start-up’s that may not have the technical expertise to assess deep tech first grant to finance a risky project that no private companies with an option to develop expertise while investing investor would fund, and can decrease investor risk when moving a technology from lab to industry. The in deep tech, with limited risk exposure. These venture debt French government instigated the creation of Technology providers often become equity investors during follow-on Transfer Accelerator Offices (SATTs) to accelerate the rounds. The venture debt market has been growing, especially transformation of French research into innovations. in biotech. 28 In August 2021, the Los Angeles Cleantech Since their creation, SATTs have supported the creation Incubator (LACI) launched its Debt Fund for cleantech of close to 600 start-ups and helped them raise over €800 million. Governments can also act as a catalyzing founders, to provide loans of $20,000 to $40,000 with force for deep tech ecosystems by putting their interest rates at or below market for companies that don’t yet influence and financing power behind key goals that qualify for traditional loans. 29 require deep tech innovations. For example, French President Emmanuel Macron recently announced that Early Commercialization his government plans to invest €30 billion by 2030 in strategic sectors, including disruptive innovations for When the product is in demand and the entrepreneur has agriculture and green hydrogen. a number of commercial contracts in place, it is time to Governments can also support the development accelerate growth, either through scaling up product delivery of deep tech ecosystems by alleviating regulatory or by expanding to new markets. Scale-ups require substantial constraints and easing the flow of information. An funds for capital-intensive deep tech companies to deploy their example of this was the French government’s creation solutions. As deep tech companies develop highly innovative of the French Tech Visa to help tech talents obtain multi-year residence permits. solutions, there is typically no proven scale-up strategy or Last but not least, governments can help de-risk deep defined set of milestones they can use to gain investors’ trust. tech for private investors at later stages of start-ups’ This makes it difficult to obtain funding for scale-up to enter development. The EIC Scaling Up Program was set up the growth stage. by the European Commission to identify the 30 best European deep tech start-ups looking for series B or A challenge for many VCs at this stage is to meet the amounts C funding and connect them with investors, in order needed for deep tech start-ups to scale, as their high CAPEX to decrease the uncertainty that currently prevails needs often require larger investments than other start-ups. around deep tech. This is particularly an issue in Europe, where the typical fund 6 This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group. three years. More than 20 institutional investors committed to are usually embedded into the ecosystems of their potential investing through the fund, which aims to provide a national corporate acquirers at the very beginning of their journey. alternative to French start-ups that currently have to look Initial public offerings (IPOs) are less common for deep tech abroad for funding rounds over €100 million due to private companies at the pre-commercialization stage. The only basis financing gaps in France. Through this type of initiative, the an investor has to evaluate a deep tech company is what has state can play a key catalyzing role for the financing ecosystem. occurred in the past, when often the value of the company is Institutional investors are also key to financing deep tech based on what could occur in the future. companies. Limited partners are still largely reluctant to invest In an attempt to fill this gap, special purpose acquisition in deep tech funds due to a perceived mismatch with their companies (SPACs) are becoming an option to consider. SPACs expected risk/reward profiles. However, there are exceptions. enable companies to become public by merging with an already Some pension funds that have a thematic investing angle (e.g., publicly listed shell company, thereby avoiding some of the more energy) and choose to invest in higher-risk, less-liquid assets cumbersome listing requirements of the IPO process. They (two to five years) can explore verticals like climate tech, with allow deep tech companies that need to access the public market the most notable example being the Ontario Teachers’ Pension for large sums of scale-up funding in early commercialization Plan (OTPP) commitment to achieve net zero emissions by stages to attract alternative funding sources (i.e., from retail 2050. OTPP will significantly grow investments in companies investors). As a result, we have seen climatetech and spacetech that generate clean energy, reduce fossil fuel demand, and help becoming key sectors for capital raising via a SPAC, particularly build a sustainable economy.31 over the past 12 months. However, the sustainability of this Sovereign funds have started playing a role in deep tech instrument remains to be seen, as there are inherent risks with financing, as they align strategic priorities and focus more on the funding model. In particular, the reputation and capabilities impact funds. In 2020, they invested a total of $2.3 billion of the SPAC sponsors is key to assessing a target company with in sectors important to combating climate change, including very limited cash flow, operating history, or revenues, and it can forestry, renewable energy, and agritech.32 Bpifrance invested be risky for a new company to create such dependencies. There in SOSV’s Pili (biopigments), among other deep tech start- is also increasing scrutiny by national regulators such as the ups, while EIT InnoEnergy, funded by the EU as a key part of U.S. Securities and Exchange Commission.34 the European Green Deal, has funded hundreds of start-ups, Project finance as an instrument presents a range of including SOSV’s VoltStorage battery.33 financing opportunities for later-stage deep tech companies, High-net-worth individuals also have the ability to shape as commercial scale-ups are CAPEX intensive. Increasingly, the deep tech financing landscape. A notable example of this deep tech venture investors are developing a parallel credit approach is Breakthrough Energy Ventures, a venture firm strategy to support their scale-ups. For example, Energy formed by Bill Gates, Jeff Bezos, Vinod Khosla, and other high- Impact Partners (EIP) established a credit fund that offers debt profile investors. Formed in 2016, Breakthrough Energy Ventures financing solutions such as first- and second-lien secured term was expected to allocate $1 billion into cleantech companies over loans and unsecured debt to SMEs. the next 20 years. Today the firm is on track to deliver on that Conclusion commitment with more than 40 portfolio companies. Deep tech solutions are addressing challenges that are global Scale-Up/Exit and Mergers & Acquisitions in nature and hence have strategic relevance to both emerging Many deep tech start-up customers (who are typically large and developed markets. Governments, innovation agencies, corporations) may be acquirers-in-waiting. They often choose and development finance organizations (DFIs) are playing a key to become acquirers after they get to know the team and the role in defining the strategic challenges and mobilizing funding technology. They then make an offer out of fear of losing toward disruptive solutions. More DFIs and public entities need access to the technology solution, to get the technology on their to build a portfolio of de-risking tools to help catalyze funding roadmap faster, or to secure the team. As discussed above, toward deep tech start-ups and accelerate adoption of deep tech corporate partnerships through investments, co-creation, or solutions in developing markets. Committing to investing in pilots could be a path to validate the technology and prove solutions to a large challenge rather than to an individual start- market readiness. It’s important to consider that choosing a up’s product would help to spread the investment risk across corporate partner at the very beginning of the development development stages and technologies. of a deep tech company might be essential for future growth, Private investors are often not familiar with the milestones and access to market, and potential exits, as deep tech companies challenges that deep tech entrepreneurs face at different stages 7 This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group. environmental, social, and corporate governance (ESG) lens The solutions developed by deeptech companies have into their core investment framework, stakeholders need to the potential to disrupt entire industries, and therefore invest more resources into helping start-ups articulate the it is critical for governments to invest in deeptech to value of deep tech solutions to global markets. catalyze funding toward solutions that contribute ACKNOWLEDGMENTS to a future aligned with their social, economic, and The authors would like to thank the following colleagues for environmental goals. This is the choice made by the their review, suggestions and support: William Sonneborn, French State in mobilizing huge resources around a Senior Director, Disruptive Technologies and Funds, IFC; Carlo Deeptech Plan operated by Bpifrance Maria Rossotto, Principal Investment Officer, Upstream – —Pascale Ribon, Deeptech Director, Deeptech Global Infrastructure, IFC; Peter Mockel, Principal Industry Department, Bpifrance Specialist, Climate Strategy and Business Development, IFC; Aaron Rosenberg, Principal Communications Officer, Risk and Public Affairs, Partnerships, Communication of their growth and commercialization journey. Developing and Outreach, IFC; Federica Dal Bono, Lead Strategy and promoting the use of metrics customized for the vertical, Officer, IDA Mobilization and IBRD Corporate Finance, Development Finance, World Bank; within New Business yet also recognized across the industries, would facilitate the and Portfolio, Blended Finance, Economics and Private continuity of investment. Additionally, investors may need Sector Development, IFC: Gonzalo Gutierrez, Associate to better understand more formal IP valuation. Building the Investment Officer, and Tingting Hu, Program Assistant; canvas of cross-stage linkages and managing the available Gilles LeCocguen, Manager of EuroQuity, Department of financing options is crucial for sustainable development of the International and European Affairs, Bpifrance; Isabelle Bébéar, Director of International and European Affairs, Bpifrance; global deep tech ecosystem. Pascale Ribon, Director, Deeptech Department, Bpifrance; The ability to raise funds across stages requires not only a Paul-François Fournier, Executive Director for Innovation, Bpifrance; Romain Bauret, Head of Studies and Products, clear vision of the steps that need to be taken to get to the Deeptech Department, Bpifrance; and Thomas Rehermann, final product, but also a well-articulated narrative. As pension Senior Economist, Thought Leadership, Economics and funds, endowments, and foundations continue to embed an Private Sector Development, IFC. 1 The Engine – Built by MIT. 2021. “2021 – Tough Tech Landscape.” 18 Altman, Sam. n.d. “YC and Hard Tech Startups.” 2 KPMG. 2021. “Future Looks Bright as Global VC Funding Soars to $300.5 Billion 19 See website: https://birac.nic.in/leapFund.php in the Second Biggest Year for VC Funding in a Decade”, January 21, 2021. 20 See website: https://www.euroquity.com/en 3 See website: https://orbis-prod.fr/ 21 Dealroom.co. 2021. “2021: The Year of Deep Tech.” 4 Hello Tomorrow. 2021. “Fundraising 101 for Deep Tech Ventures.” 22 Siota, Josemaria, and Mª Julia Prats. 2021. “Open Innovation: How Corporate 5 Nedayvoda, Anastasia, Peter Mockel, and Lana Graf. 2020. “Deep Tech Giants Can Better Collaborate with Deep-Tech Start-ups. The Case of East and Solutions for Emerging Markets”, EM Compass Note 94, IFC, November 2021. Southeast Asia.f 6 Refer to “Deep Tech Solutions for Emerging Markets” for more information on 23 Different Funds. 2020. “DeepTech Investing Report 2020.” Israel’s technology transfer offices (TTOs). 24 Nedayvoda, Anastasia, Peter Mockel, and Lana Graf. 2020. 7 Palmer, Maija. 2021. “Does the University Tech Transfer System Need an 25 Dillet, Romain. 2020. “Marie Ekeland Launches 2050, a New Fund with Overhaul?” https://sifted.eu/articles/university-tech-transfer-overhaul/ Radically Ambitious, Long-Term Goals.” 8 BCG and Hello Tomorrow. 2019. “The Dawn of the Deep Tech Ecosystem.” 26 Rathi, Akshat, 2021. “Bill Gates-Led Fund Raises Another $1 Billion to Invest in 9 For more examples refer to The Engine’s portfolio here: https://www.engine. Clean Tech.” bloomberg.com, January 19, 2021. xyz/founders/ 27 Santi, Antonella. 2020. “Sustainability in Space.” www.eib.com, December 10, 10 European Commission. n.d. “EIC Accelerator Pilot.” 2020. https://www.eib.org/en/stories/climate-change-data-from-space 11 Bhatla, Prabhjeet. 2021. “MeitY Startup Hub Partners with India Accelerator.” 28 Torreya. 2019. “Creating Value Through Intelligent Borrowing – Part I: The www.entrepreneur.com, August 4, 2021. Evolving Landscape of the Life Sciences Debt Market.” 12 See website: https://greentech.sk.ru/en/ 29 Los Angeles Cleantech Incubator. 2021. “LACI Announces First-of-Its-Kind Debt 13 Standard Chartered. 2021. “Funding the Clean Energy transition: A Look at Fund.” https://laincubator.org, August 2, 2021. Blended Finance.” 30 “The Emerging Climate Technology Framework.” n.d. www.breakthroughenergy. 14 In, Soh Y, Ashby H. B. Monk, and Janelle Knox-Hayes. 2020. “Financing Energy org/scaling-innovation/catalyst Innovation: The Need for New Intermediaries in Clean Energy.” Sustainability, 31 Segal, Mark. 2020. “Ontario Teachers’ Pension Plan Sets Goals to Slash 12(24). Portfolio Emissions, Ramp Green Investments.” 15 Flaherty, Nick. 2021. “UK Government to Take Equity in Deeptech Startups.” 32 Joffe, Benjamin. 2021. June 17, 2021. “What SOSV’s Climate Tech 100 Tells www.eenewseurope.com, July 23, 2021. Founders About Investors in the Space.” 16 Agogué, Marine. 2012. “Modéliser l’effet des biais cognitifs sur les dynamiques 33 Marsh, Alistair. 2021. “Sovereign Wealth Funds Invest In Climate Technology, industrielles : innovation orpheline et architecte de l’inconnu.” Gestion et Renewables.” May 11, 2021. management. Ecole Nationale Supérieure des Mines de Paris, 2012. Français. 34 Michaels, Dave. 2021. “Regulators Step Up Scrutiny of SPACs With New View 17 BCG and Hello Tomorrow. 2021. “The Deep Tech Investment Paradox: A Call to on Warrants.” August 12, 2021. Redesign the Investor Model.” 8 This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group.