Study Reveals The Top Three Barriers To Deep Tech Investment Success

deep tech investing

There are untold fortunes and unimaginable societal value locked up in the laboratories, research institutions, startups and corporations. Companies that want to turn that latent potential into real help and real products face several organizational barriers, according to a study by a team of researchers.

In an article published in the MIT Sloan Review, the researchers — Josemaria Siota, executive director of the Entrepreneurship and Innovation Center at IESE Business School and Maria Julia Prats, the Bertrán Foundation Professor of Entrepreneurship at IESE Business School — report on three reasons that organizations struggle with investing in deep tech companies.

NIH Syndrome

They report the first barrier is a common one: Not-Invented-Here Syndrome. Most research and development teams want to develop technology themselves and not rely on outside firms or inventors, according to the researchers. The deeper cause of this may be insecurity. R&D teams are afraid they will lose control or doubt that the outside technology will work.

“In any case, collaboration proposals can be rejected without further analysis, and growth opportunities are lost,” the researchers write.

The team recommends chief innovation officers secure proper expertise to evaluate collaborations with deep-tech startups and neutralize internal bias against adopting technology from outside innovators.

As an example, they point to LG Technology Ventures: “Consider LG Technology Ventures, the corporate venture capital arm of LG Group, which has over $400 million in investments in deep-tech startups. There, internal due diligence reviews are complemented with an external expert opinion whenever there is a risk of internal bias against an opportunity.”

Risk Aversion

Deep Tech investing is not for the faint of heart, the researchers warn. Investors face long time horizons, substantial capital investment, technology that is complex and difficult to understand and founders who are scientists not business people.

These are real risks, the researchers point out: “In reality, however, such funding can come with high hurdles, such as time-to-market durations that often exceed five years, and the greater risk inherent to novel and complex technologies. The difficulties are underscored by an analysis we conducted using CV (corporate venturing) data from 46 international companies that was collected under the auspices of IESE Business School in 2018. It revealed that 68.9% of the initiatives failed to deliver their expected results.”

Of course, most people are naturally inclined to avoid risk, but there are ways around allowing risk aversion to stunt deep-tech investing entirely, according to the team.

“The antidote to risk aversion is risk management,” they write. “Executives assign different risk profiles to various CV mechanisms. For example, they see startup acquisitions, corporate venture capital and venture builders as high risk. (With venture building, the corporation allocates resources to the creation of an external venture through talent recruitment — usually external — and the development of a business model that will benefit the corporation.) Hackathons, scouting missions, and challenge prizes, on the other hand, are viewed as low risk. So when CINOs consider the combination of CV mechanisms to use, it’s important that they evaluate the amount of risk their colleagues in senior management are willing to take on and choose mechanisms that match it.”

Tailoring pitches to other management team members and building incubators-accelerators are other ways to manage risk, the researchers add.

“CINOs (chief innovation officers) can also demonstrate the value of proposed investments by creating a sandbox (or other low-risk/low-cost testing environment) to develop minimum proofs of concept,” they write. “For example, Thailand’s Siam Commercial Bank created a sandbox that mirrors its live environment to provide third-party developers and entrepreneurs with a way to test and validate their apps against the bank’s APIs.”

Staged investments can also limit the financial downside in worst-case scenarios and can help ease the misgivings of senior executives, according to the team.

Top-Down Cultures

Top-down corporate cultures — with centralized decision-making, standardized processes and hierarchical structures — can stifle ideas originating on the front line and erode a startup team’s motivation, the researchers warn. Such cultures usually feature centralized decision-making and standardized processes. .

As an antidote, the researchers advice: “CINOs can use several tactics to overcome this barrier. While changing the culture is likely to be a bridge too far for CINOs, they can enlist influential internal advocates, such as executive committee members or business unit heads, or turn to external corporate innovation experts to help make a convincing case for external innovation to the senior management team.”

Overcoming these barriers can pay off for companies — and the team offers a few examples: “The benefits of deep-tech CV, including gaining access to leading-edge technologies and fielding innovative new products and services, are compelling. That’s why Toyota backed autonomous mobility startup Pony.ai, Samsung invested in quantum computing startup IonQ, and Lenovo partnered with lithium-ion battery startup CosMX. Indeed, 71% of the companies we studied are planning to increase their innovation efforts involving deep-tech startups during the next five years. To capture the payoffs of deep-tech CV, however, CINOs will need to recognize and overcome the internal barriers to success.”

There may be no way around deep-tech investing for many companies. It is growing larger, according to the researchers, who add deep-tech corporate venturing — the second-largest source of this funding — grew from $5.1 billion in 2016 to $18.3 billion in 2020.

The study included an analysis of corporate venturing in 180 companies and interviews with 77 of their innovation executives, most of whom work in companies with CV portfolios that include a 25% or greater concentration of deep-tech startups.