DeepTech: The next frontier
Will DeepTech be the spark that transforms how we live?
My entire career has been in software. I joined Microsoft, fresh out of school, in October 2000 and have been working either as a software developer or more recently in engineering leadership since then. The tech that I experienced is the one that typically starts in a garage, where one or more software developers are furiously coding up an MVP in their garage. The tech that uses familiar tools like Jira, GitHub and leasing infrastructure by the minute on AWS. It’s the “tech” that yielded the likes of Facebook, Amazon, LinkedIn, Google, Microsoft Teams - a product I actually worked on. Sorry :(
I believe that this tech is here to stay, but it will (should, in my opinion) take the backseat to another class of technology: DeepTech.
The past 20 years have witnessed the rise of some immensely powerful technology companies, which include the likes of Facebook, Apple, Netflix, Microsoft, Amazon and Google. The infamous. FANMAGs as they are colloquially referred to. The combined market cap of these stocks alone represents ~$7T based on market close prices on March 9, 2021. To put things in perspective, the market cap of all publicly traded companies across the world is ~$90T.
Although these companies are substantially large, I question the impact they had on humankind. Yes, they’ve changed how we consume information, how easy it is to buy almost anything and have it delivered in hours, how we consume media and communicate with each other. But, and to be blunt about it, the impact these companies, and generally speaking the tech of the 2000s, hasn’t been as momentous as other inventions. Consider electricity as a prime example. The advent of harnessing the power of electricity dramatically altered life. Most everything we do today relies on our ability to harness the power of electricity. We haven’t had our “electricity” moment in spite of all of the perceived advances in technology over the past 20 or so years.
You might argue that this is my subjective view. Perhaps I am a naysayer and don’t truly appreciate what these companies have done. Yet, there’s also an objective way of assessing the impact of technology over the past 20 years and that is looking at changes in economic activity. That’s the approach Tyler Cowen took in a 2011 NYTimes article. Cowen argues that technological change since the early 1960s hasn’t been as transformative for ordinary peoples’ lives as the change that went before. I agree with that view.
Another, objective way, to assess the economic impact of these firms is to look at Total Factor Productivity (TFP) and measure its change over a period of time. I did that for a rolling 10 and 20 year time horizon for the period from 1955 through 2019.
Source: FRED StLouis
The table below shows the 10 year periods with the lowest change in TFP over that period. I have only shown the bottom 10 decades here for brevity. The list is dominated by various decades spanning the 2000s, with one entry from the 70s. All this tech and yet, the 2000s are economically worse than the 70s and 80s, periods that were dominated by oil shortages, inflation and recessions.
Flipping the order, shows that the 50s and 60s (hello moon exploration) were the periods with the highest change in TFP. The 2000s do not appear in the top 10 decades with the highest change in TFP.
One could still make an argument that this economic stagnation has nothing to do with technology firms of the 2000s. In fact, an argument can be made that the only reason the TFP is positive is because of the economic impact of these firms. I doubt that and still go back to my - subjective - thesis. We haven’t had our “electricity” moment in the 2000s. A reductionist view is to try and assess the world without Apple, or Facebook et cetera. One can make the argument that World - Facebook = a better place, but I digress. On the other hand, try imagining a world without electricity. If you take away electricity, we go back to the dark ages. Literally.
Which brings me back to deep technology (DeepTech) and why I am incredibly excited about it. Deep technology companies are built on tangible scientific discoveries or engineering innovations. This class of companies start working on some technological or scientific innovation, which they might use to build a business model around. This approach is the converse of how typical technology companies work. Those start from a business model, say selling shoes online, and use technology to enable this business model. DeepTech companies start from de-risking the science/technology whilst traditional tech companies start from the market risk. Examples of deep-tech companies include the likes of those working on robotics & automation, energy, medical devices, novel ways to treat and detect cancers and other diseases, innovations in making food, space exploration, transportation and so on. These are hard problems with significant implications for humankind. They could dramatically alter how we live.
DeepTech companies, beyond having the promise of significantly altering our lives, share a few common traits. They can be very capital intensive. You’ll need a lot of capital if you are launching rockets to Mars or building micro nuclear reactors. Similarly, time horizons for these companies can be measured in the decades. Employees and investors in these companies should have longer horizons than the traditional 7-9 year path to exit of a typical software startup. Even more importantly, the skills needed to make these companies successful are diverse and multidisciplinary in nature. Your typical software company is mostly dominated, at least in the startup years, by software engineers. It is not unusual to see chemists, physicists, electrical engineers, material engineers, software engineers, ML engineers, doctors and other “hard” sciences disciplines all working in DeepTech companies.
Perhaps my bullishness on DeepTech is romanticism on my part. My views might well be untethered from reality. Time will tell. My hope is that in a few years we reap some of the benefits of the amazing startups in this space. I’d much rather we invested in new energy sources, new cures, space exploration over a new social network. One in which users can share verbal messages, so long as each message is no more than 280 words long. Wait, I better start this one, it could be the next decacorn!