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What CEOs need to know about deep tech

May 29, 2022
Borderless Future

This is the first in a series of articles highlighting how deep tech—the problem-driven application of advanced technologies to address large-scale issues—can help deliver superior value and growth while enabling companies to achieve their goals. Here we examine why deep tech will almost certainly be part of your company’s future.

Advanced technologies will bring big changes. Which companies will be ready to capitalize?

For most companies, the question of whether advanced technologies will disrupt their business is a matter of when, not if. A corollary question for incumbents is whether they will be drivers or casualties of the changes these technologies will enable.

There are plenty of reasons why deep tech is starting to make deep inroads. One of the biggest and most immediate is the global push for more-sustainable business practices. We know that in many industries, true sustainability (net-zero emissions, for example) cannot be achieved without the help of new technologies. We also know that moving early as a new technology trend emerges can create enormous value (witness Tesla taking on electric vehicles or Pfizer, BioNTech, and Moderna investing in RNA vaccines).

As our colleagues recently pointed out in Fortune, the number of startups disrupting the long-standing competitive advantage conferred by scale is growing fast. Backed by the rapid growth of high-risk venture capital funding, small companies often win by focusing on solving critical, large-scale problems and exploiting a combination of maturing digital technologies (such as AI and cloud computing) and emerging physical technologies (synthetic biology and architected materials, for example). This convergence is the essence of deep tech innovation.

Little surprise then that a growing number of big-name venture capital investors are shifting their focus from software to deep tech, attracted by the prospect of solving the biggest challenges facing the world while making money doing it.

BCG and Hello Tomorrow have estimated that venture capital funding for deep tech startups increased from $15 billion in 2016 to more than $60 billion in 2020. In the first eight months of 2021, venture funds put $77.5 billion to work in advanced tech startups, according to MIT’s venture firm, The Engine.

For incumbents, waiting on the sidelines to see which technologies, or combinations of technologies, develop high-impact applications is not a practical option. They will find themselves playing catchup. Any existing business that has set ambitious goals, such as improving sustainability or building resilience, will need to incorporate one or more deep tech solutions sooner rather than later. This includes companies that produce a physical product or that support a business that produces a physical product, especially if they have made net zero commitments to their customers and shareholders.

But deep tech presents established companies with a twofold challenge. Evaluating the potential of advanced technologies is tough, and finding a winning combination of market need and emerging technology that meets it is harder still. Even the most successful venture capitalists place more losing bets than winning ones.

Here’s our guide to how CEOs can size up the relevance of deep tech for their own organizations.

Identify the Opportunities
A good way to start is by taking a page from the startups and adopting a problem-centric approach. Rather than focusing on the individual technologies themselves, it can be more productive to think about the major needs and problems in business and in the economy that emerging technologies could solve. Venture capital investor Mike Maples calls this “backcasting”: starting from an imagined future state and working backwards to envision how to get there.

The think tank RethinkX has used this approach to illustrate what a global economy based on sustainable energy systems, food production, and mobility could look like in 2035. Its work highlights the idea that technology-driven changes in agriculture or mobility would ripple throughout the global economy, improving sustainability while fundamentally altering value chains and disrupting incumbent systems and players. For example, a switch to proteins manufactured with precision fermentation (a “microbrewery” for cell-based meat) and vertical farming radically changes the requirements for water usage, shipping, and energy.

Since combating global warming is one of the biggest challenges we face, we analyzed the opportunities for deep tech solutions in six sustainability-related areas.

Sustainable Buildings and Materials. Construction and buildings account for 38% of global energy- and process-related emissions, with 10% coming from materials and construction and 28% from energy related to building operations. What if building materials could be sustainably produced and finished structures offered superior functionality such as enhanced energy efficiency and self-healing? Emerging materials and production process technologies now offer paths to this sort of performance. New intelligent building systems that integrate advanced sensors, smart materials, edge computing, and AI can reduce energy consumption. Making these changes at scale requires reimagining current construction systems for raw materials and components and retrofitting older residential and commercial structures.

Clean Energy Systems. The expanding adoption of sustainability targets is forcing a gradual transformation in energy generation, storage, and distribution. Three quarters of all greenhouse gas (GHG) emissions come from energy generation, and about 85% of current global energy generation uses fossil fuels. What if we could have abundant, clean energy at any time? Energy systems are rapidly evolving as advances in integrating new power sources, materials, batteries, sensors, and AI enable new opportunities for local and modular generation, storage, and real-time adaptive power distribution. As solar and batteries penetrate more markets, we are also seeing new production and distribution models emerge, from dynamic demand response to distributed microgrids, that challenge the dominant paradigm of power plants and distribution networks.

Efficient Mobility. Roughly 16% of global GHG emissions are transportation related, with 30% of the transportation total coming from freight, 12% from road vehicles, 2% from shipping, and 2% from aviation. Electrification and decarbonization, as well as advances in AI and autonomous vehicles, will present both existential risk and big opportunities for disruptive growth for players throughout the transportation and shipping sectors. For example, what if the value chains for logistics and transportation were unbundled and reimagined? Could improving battery chemistry and performance, coupled with advancements in AI and sensors, radically reshape transportation and logistics? Could today’s mix of manned air, rail, and road (trucking) be transformed into a more efficient autonomous distribution and delivery system, involving everything from e-bikes to self-driving long-haul trucks? The slow build-out of EV charging infrastructure and the lack of success so far with drone delivery highlight that simply introducing a new technology will not lead to radical change.

Sustainable Manufacturing and Materials. Eight global supply chains, including food, construction, fashion, electronics, and mobility (and the energy they consume), account for 50% of all emissions, with raw materials extraction and refinement responsible for the majority of CO2. What if it were possible to combine upcycled materials and biomass to displace nearly all virgin materials? What if flexible, localized manufacturing facilities could achieve comparable economies of scale to those of large plants? These changes would accelerate the current restructuring of global supply chains, create ripple effects on logistics, and potentially generate substantial positive social impact. It’s starting to happen: emerging materials and synthetic biology platforms are being integrated into new manufacturing systems and offer the means to break through long-standing tradeoffs involving efficiency, scale, resilience, and sustainability. Still, existing value chains encourage drop-in substitutions that must compete on price and performance instead of unlocking new use cases and functionality.

Green and Efficient Agriculture. Animal-based foods account for nearly 60% of agricultural GHG emissions, and as income levels rise, demand for these foods is projected to increase by 70% by 2050. Productivity in plant-based agriculture also needs to rise by 50% if we are to grow enough food to feed the projected global population in 2050. At the same time, the agriculture sector must reduce emissions by 70% to meet global warming goals. What if a combination of regenerative agriculture and synthetic biotechnology could work together to address both issues? Emerging technologies that improve and personalize nutrition, produce protein more sustainably, improve plant yields, and reduce food waste may offer ways to rethink the global agriculture system, but they will also require a reimagination of the value chain from farm to table that is on par with the Green Revolution of the 1960s.

Clean Water and Sanitation. Some 3.2 billion people today live in areas with water scarcity or shortages, and by 2050 water demand is expected to grow by 55%, particularly in the developing world. In semi-arid climates, such as parts of California, drought coupled with increasing demand from agriculture, industry, and population have outstripped conventional supply options. Advances in desalination, materials science, and synthetic biology may offer ways to unlock both positive social impact and commercial value. But as current debates over desalination in southern California illustrate, systems for water usage, distribution, and storage, and issues related to brine or salt discharge, must also be considered, even if desalination were free and energy plentiful. READ MORE

By John Paschkewitz, Maxime Courtaux, Vinit Patel, François Candelon, and Antoine Gourévitch

Source: bcg.com

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