Policy Literacy: A Strategic Imperative for VCs

Deep tech startups are characterised by their focus on transformative, science-driven innovations. While their potential for groundbreaking advancements is significant, they typically operate in generally highly regulated sectors and are influenced by evolving public policies. For VCs investing in deep tech, navigating the policy landscape is not merely a secondary consideration but a strategic necessity. This paper examines the importance of policy literacy for VCs and its impact on investment outcomes.

The Regulatory Complexities of Deep Tech

Deep tech startups often seek to penetrate industries with stringent regulatory frameworks like healthcare, energy, and AI. These sectors require compliance with complex regulatory standards, which presents significant challenges for new entrants. For instance, in healthcare, startups must adhere to stringent requirements set by bodies like the FDA, which mandate rigorous testing and validation processes to ensure safety and efficacy. Compliance with environmental regulations and grid connectivity standards in the energy sector adds complexity to product development.

The impact of regulatory compliance can manifest in various ways, often delaying product launches and significantly increasing operational costs due to the need for specialised legal and regulatory expertise.

VCs with a deep understanding of these regulatory frameworks provide critical value. They can assess the risks associated with entering highly regulated markets and offer strategic guidance to portfolio companies. This includes navigating approval processes, optimising compliance strategies, and identifying opportunities within regulatory shifts that startups can leverage for competitive advantage.

Navigating Evolving Policies

As technologies such as AI, synthetic biology, or quantum computing continue to advance rapidly, governments around the globe are proactively developing policies to address critical issues effectively, including ethical considerations, safety regulations, and security concerns. In this dynamic landscape, deep tech VCs must anticipate forthcoming regulatory developments. By doing so, they can ensure that their portfolio companies remain compliant with new laws and retain a competitive edge in the market.

Leveraging Government Support

Governments play a vital role in advancing and supporting deep technology innovations through various methods, including grants, tax incentives, and public-private partnerships. These initiatives provide critical financial resources for startups and foster a market environment conducive to technological development. Moreover, VCs with expertise in evolving policies can play a pivotal role in contributing to these changes. By leveraging their understanding of government programs and incentives, they can help startups navigate the complex resource landscape more effectively. This support ultimately helps reduce the capital requirements for emerging companies and strengthens their growth trajectory, fostering a more resilient deep tech ecosystem.

Strategic Collaborations

The deep tech sector frequently intersects with vital public interests such as defence, healthcare, and sustainability, addressing some of society’s most pressing challenges. Accordingly, VCs who possess a deep understanding of the intricate dynamics of policy can play a pivotal role in these intersections. By facilitating strong collaborations between innovative startups and government agencies, these VCs can help create synergies that drive technological innovation and ensure that such advancements align with public policy objectives. This collaborative approach can accelerate the development and deployment of transformative technologies, ensuring they effectively serve both market needs and public interests.

Early Identification of Risks

A well-informed regulatory strategy should shape the entire development roadmap of a deep tech startup. From the earliest stages, companies must align their R&D priorities, clinical trials, product certifications, and market entry strategies with regulatory requirements to avoid roadblocks that could derail commercialisation. VCs who integrate policy considerations into their investment approach can help startups build a realistic timeline for approvals, ensuring that innovation efforts remain viable within the constraints of evolving regulations.

Moreover, regulatory risk assessment is a critical component of due diligence. Compliance feasibility can determine whether a company is investable in sectors such as biotech, AI, quantum security, and autonomous systems. Startups operating in highly regulated industries may face long approval cycles, requiring patient capital and staged investment strategies. By evaluating regulatory hurdles upfront, VCs can make informed decisions on capital allocation, valuation expectations, and exit timelines, ensuring a sustainable path to commercialisation.

Ultimately, a proactive approach to policy literacy enables VCs to mitigate risk and unlock new opportunities, positioning their portfolio companies for long-term success in complex, highly regulated markets.

Market Shaping Through Advocacy

Deep tech VCs have a unique opportunity to influence governmental and industry policy through active advocacy and robust thought leadership. Their position allows them to engage in key regulatory discussions, influencing the frameworks that govern emerging technologies. Promoting regulations supporting and encouraging innovation can create a more favourable market environment for their portfolio companies.

Leveraging their expertise, they can advocate for regulatory frameworks that drive technological progress while ensuring that investments lead to sustainable growth and competitive advantages in the marketplace.

Ethical and Societal Considerations

Deep tech advancements often raise a variety of ethical and societal concerns. For instance, AI can reinforce biases, leading to unfair outcomes in critical areas like hiring, law enforcement, and lending. Similarly, genetic engineering raises questions about the moral implications of altering human DNA and the potential long-term effects on society. In this complex landscape, VCs with strong policy literacy—an in-depth understanding of regulations and governance—play a crucial role in guiding startups effectively. They can serve as invaluable resources by guiding how to navigate the ethical dilemmas associated with deep tech. Their proactive involvement can help startups recognise potential ethical issues and develop strategies to align their innovations with societal values. By fostering an ethical framework and implementing best practices, these VCs can assist startups in mitigating reputational risks and building trust with consumers, ultimately leading to a more sustainable and responsible approach to technological advancement.

Navigating International Regulations

As deep tech startups continue to scale their operations globally, it becomes increasingly important for these companies to understand the various cross-border regulatory frameworks that govern their activities. Navigating the landscape of international regulations can be complicated, as different countries have their compliance requirements and policies that may vary significantly. This is where the expertise of policy-literate VCs proves invaluable. These investors understand the regulatory environments in multiple markets and can provide essential guidance to startups. By leveraging their knowledge, VCs can help these emerging companies navigate the complex maze of international compliance requirements, enabling smoother and more efficient market entry into foreign territories.

Ultimately, a solid grasp of these regulations is beneficial and crucial for scaling deep tech startups successfully in an ever-evolving global marketplace.

Competing in Geopolitical Contexts

Technologies such as quantum computing, AI and semiconductors are increasingly positioned at the centre of geopolitical competition among nations and corporate entities. These advanced technologies drive innovation and serve as strategic assets that can influence the power dynamics between countries. As such, deep tech VCs need to comprehensively understand the factors affecting the market, including trade policies, economic sanctions, and international agreements. These elements can significantly impact their investment decisions and the potential success of the technologies they choose to fund. Therefore, an awareness of the geopolitical landscape is crucial for making informed investment choices in the rapidly evolving deep tech sector.

Recommendations for VCs

Develop Policy Expertise. To effectively navigate the complex regulatory landscape, investing in internal teams and external resources is essential. By doing so, organisations can be consistently updated on relevant regulations, compliance requirements, and emerging policy trends that could impact their operations and strategies. This knowledge empowers decision-makers to make informed choices that align with current and future legal frameworks.

Engage Policymakers. Establishing and nurturing relationships with regulators and policymakers is crucial for organisations aiming to remain proactive in a constantly evolving environment. By cultivating these connections, companies can gain insights into anticipated regulatory changes and work collaboratively to influence policies favouring their interests. Active engagement also allows organisations to advocate for their needs and contribute to developing regulations that benefit the industry and the public.

Foster Public-Private Partnerships. Graduating from transactional relationships to meaningful collaborations with government entities can open doors to vast growth opportunities for portfolio companies. Organisations can enhance their scalability and innovation potential by leveraging government support—whether through funding, resources, or shared expertise. These partnerships could drive economic growth and promote strategic alignment between public interests and private sector capabilities.

Adopt a Global Perspective. In an interconnected world, grasping the nuanced international policy landscapes is vital for supporting startups aiming to expand globally. Understanding diverse regulatory environments, cultural considerations, and market dynamics allows organisations to tailor their strategies effectively. By embracing a global view, companies can identify entry points, mitigate risks, and enhance their competitiveness on the international stage, facilitating smooth transitions into new markets.

Conclusion

In today’s fast-evolving technological landscape, policy literacy has shifted from a mere competitive advantage to a fundamental necessity for deep tech VCs. Understanding the complex interplay between technology, regulation, and policy is now essential to the investment decision-making process.

For deep tech VCs, regulatory and policy expertise goes beyond mere compliance—it is a strategic asset. By being well-versed in policies, they can identify new markets and breakthrough technologies and forge valuable partnerships that might otherwise go unnoticed. This proactive approach allows VCs to unlock new opportunities, mitigating potential risks associated with unforeseen regulatory changes and ensuring their investments adapt to emerging demands.

About Us

ACT Venture Partners is a deep tech venture capital fund manager that aims to catalyse the efforts of ambitious tech entrepreneurs to define a positive future.

Disclaimer

This article does not promote any product or service. It does not reflect the views of ACT’s Limited Partners but the fund managers' perspectives on the VC industry's evolving role. Reusing this document is allowed, provided appropriate credit is given and any changes are indicated.

REFERENCES

Baker McKenzie. (2023). Navigating Regulatory Change in Private Equity Tech Investing.

Barrister Group. (2023). UK AI regulations and their impact on tech companies.

Bessemer Venture Partners. (2023). State of Deep Tech.

Boston Consulting Group. (2022). What CEOs Need to Know About Deep Technologies.

Digital Catapult. (2023). Deep Tech Investment Challenges and Opportunities in 2024.

Inc42. (2023). Decoding the national deep tech startup policy.

Hedman Legal. (2023). Enhancing the EU regulatory framework for the deep tech sector.

McKinsey & Company. (2023). European Deep Tech: What Investors Need to Know.

Springer Link. (2024). Breaking or making futures: How laws and regulations shape innovation in emerging innovation systems.

UK Government. (2023). Smarter regulation: Delivering a regulatory environment for innovation, investment, and growth.