New financing models needed for deep tech ventures

A discussion from Venture Downunder 2023

There are solutions to planetary problems, but they will only have an impact if they make it to scale.

New adventure capital is going after solutions to climate change and accelerating sovereign capability in expensive industries currently concentrated in other parts of the world, like semiconductors in Taiwan and battery production and solar panels in China.

Companies that build sustainable food systems, quantum computers and energy transition technologies need more than an AWS account and hustle to materialise their potential.

The old ways of funding hard things like this need a fresh look so that we get there faster, and single points of failure don’t carry so much risk so early on that new solutions fall.

A few of us explored this at Venture Downunder this year. We came together from across the system to explore what we might do collectively and, if we were to design a better model, what it might look like.

Here are some notes on the session in the hope that they inspire a bigger conversation.

#1 — Should the lifetime of some venture capital funds be extended?

Are ten years too short to deliver deep tech impact? We investors need to work with our companies to accelerate a path to impact, but perhaps we should also have a category of funds that are designed to go for bigger swings. Are there LPs that would be motivated to support this? How might governments motivate this extended risk and hold on capital?

#2 — How might venture capital and debt financing collaborate differently?

Today there is a gap. Venture capital can take capex-intensive companies so far, but then the model starts to break as the dilution becomes too heavy. Investors run for the hills when a founder utters the word “capex”, so what can we do differently?

How does this work if a new bio-material company needs a new kind of factory to deliver carbon-negative production when project financiers may need three or more factories to be built and operate sustainably before they explore debt financing?

• Startups need to collaborate with debt financing organisations sooner to deliver the risk profile they need sooner. Like product market fit for financing. What can be modularised and repeatably delivered? What aspects of the business are considered the most risky, and how might they be proven sooner?
• Some climate-aligned debt financiers are coming upstream towards venture investors to support projects earlier. Often they invest a blend of debt and equity to manage the risk.

#3 — Could collaboration between different parts of a new industry spread this risk?

One of the reasons new industries fail to jump-start or stay constrained as an incremental build on an existing industry is that each component builds its part in isolation. Sometimes we wait for years for foundational infrastructure to come, and it never does.

I mean, whose job is it to have the idea and make it happen?

Can we take a design approach to building industries where different parts come together to understand what role each of us might play in making the new industry come together?

Australia’s nascent bio-economy was stalled because there was no infrastructure for production, with thinking at the time requiring a few hundred million to unblock. We gathered competitive startups, government, research and capital into a room in 2021 and asked, “What can you do to make this happen?” Australia now has Cauldron — and it took a village.

#4-How might governments stimulate new capital?

If there is a risk gap between current sources of capital to get through the scale-up ‘valley of death’, there is the opportunity for governments to take some of the load.

• As we build these first-of-a-kind (FOAK) infrastructures for new industries, can governments underwrite the risk with guarantees in the event that the build does not go according to plan? Is there a sliding scale that matches the maturity of the project with the amount that can be underwritten that migrates projects to existing project financing providers?
• Can governments guarantee off-take agreements that stand behind financing? New markets can’t always show guaranteed new offtakes, which means new markets can’t begin.
• Can superannuation funds offer their members an opt-in account that will invest some of their money towards (more risky) climate infrastructure? Could government match these kinds of investments, encouraging superannuation to offer the program?

It seems that we are at an important moment in Australia, where governments, big industry, R&D organisations and citizens are all tuned into the opportunity of building big new domestic industries that ultimately make the world better.

It is on us to collaborate to maximise the opportunity of having the wind in our backs and show the people and organisations that take this risk that it is worth doing.

Let’s make industry building and Australian reflex that we’re good at.

Thanks to my friends at Venture Downunder for having this conversation.

🖖🏻 #hack+hustle+flearn

I am a deep tech investor, and I’m building out loud. Subscribe here or follow me @philmorle