Public purpose technology (PPT), technologies that solve big problems relevant to a sizeable public - think healthcare or security - need many actors to work together to scale properly.
As we saw in the last installment of this series, the state has a crucial role to play in PPT; it can set the right incentives and also help with investment (and research) funding to lay the groundwork. But the state has historically not proven very good at picking winners and going the ‘last mile’ to commercialise inventions.
True, the iPhone would have been impossible without billions spent by various U.S. departments but it ultimately wasn’t a state department that came up with the device now connecting billions of people every day. It was private entrepreneurs financed by venture capital investors (including Sequoia and Venrock), and the role of (venture capital) investors for PPT is what I want to focus on today.
VCs have historically had few incentives to solve big problems…
Much of the big VC successes we have celebrated over the last decade are simple consumer plays. Easier accommodation when traveling (AirBnB), faster and seamless food delivery (Deliveroo and Co.), shopping with one click (Amazon, Zalando), finding information online (Google) - much of it focused on convenience and simplification.
I argued before that this focus on fast- and easily-scaling companies has in fact gone too far; the latest craze around immediate delivery apps from Gorillas to Getir is a case in point. Do we really ever need anything delivered to our doorstep within 10 minutes? Is that really a problem we should spend billions on solving? But VCs are rarely blamed for ‘solving the wrong issues’ - after all their business model as a financial intermediate forces them to focus on blitz-scaling unicorns with a big exit potential.
As much as VCs might paint themselves as kingmaking magicians who pick and enable the Zuckerbergs and Gates of this world to flourish, they really have to mostly focus on making money for the asset owners.
At least in their perception, doing that - and doing it quickly - has been harder with big, public-facing problems, such as healthcare, security, infrastructure, or cleantech. Either the research wasn’t mature enough (e.g. for gene therapy) or the ideas were ‘too hardware focused’ (e.g. climatetech in the early 2000s).
The need for a long holding period and too much capital (particularly for hardware) pushed most VCs away (and burnt some others); only few VCs were willing to get into the ‘tough tech’ and big problems, much of which we can describe with PPT.
Lux Capital, The Engine (out of and at MIT), and High Tech Gründerfonds (HTGF) out of Germany are exceptions. And in fact they are exceptions which are now showing us a way forward for a new VC model that does take PPT seriously and can benefit from it tremendously. Much of PPT is now within the VC business case.
…but the ‘business case’ for PPT is growing!
Lux Capital started already in 2000 and now has $4 billion under management. Led among others by Josh Wolfe, recently dubbed VC’s ‘renaissance man’, has from its inception focused on ‘unloved’ sectors, such as intelligence, defense, energy and health. For years, Lux was smiled at for having too many PhDs in its partnership and betting on complicated things most VCs couldn’t wrap their head around, literal science fiction (e.g. in the space of experimental biotech or human/machine interaction). But recently, Lux has made big waves, among others with leading the SPAC frenzy - and having 13 portfolio companies (!!) IPO/sell since 2019.
The Engine out of MIT has had headlines in a similar direction recently with its unique focus on ‘tough tech’. At the intersection of ‘breakthrough science, engineering and leadership’, The Engine invests its $435m of ‘long term capital’ in ‘pioneering solutions to our most complex challenges in climate, health, computing’ - quintessentially a PPT fund if it ever exists. MIT is the anchor investor (and is also contributing a soon-to-be-opened startup hub on its campus) while Harvard joined as LP for fund 2 - so the fund is perfectly positioned to commercialise innovation, right from the hub of one of the most powerful university ecosystems.
Europe can learn from this and extend its support for university spin outs in particular even more. Funds like HTGF out of Germany, with almost €900 million under management and investments in more than 600 companies since its inception in 2005, are a good starting point. HTGF is basically giving (small amounts of) money to every reasonably promising PhD with an idea - and that is and important part of the ecosystem: giving entrepreneurs a chance to start.
On top of that, much of HTGF’s money comes from government departments (Federal Ministry for Economic Affairs, KfW Capital) and the Who is Who of German business (from BASF and Bayer to Deutsche Bank, Haniel and Bosch) - and is in this way doubly tied to the public interest (of the German state/economy).
I would go one step further: for PPT to really break through in Europe, we need more government-bankrolled VCs which are pacing the way and taking the early stage risks in particular; this could lure in more traditional VCs at later rounds and eventually along the value chain. Of course, it would help if more VC cash was explicitly focused on as well as ‘accidentally’ involved in PPT - or tough tech or university spin-offs for instance. It might even just take one big name VC that would bring with it a clout that attracts other VCs, talent (and more money) needed to grow PPT.
Obviously, throughout growing PPT, what we need to avoid is to turn it into yet another fast-paced trend VCs focus on momentarily. The blitzscaling handbook needs to be kept out of this ecosystem - and that is ultimately something which the asset owners, particularly state funds, can push on.
In the last piece of this series next week, I will focus on some of the other challenges PPT is facing in its journey to mainstream - and how to possibly overcome them - in an interview with two fantastic experts, Lyel Resner and Tanya Filer.