Deep Tech Investment on the Rise
Larry Fink, the CEO of BlackRock, in a conversation with Andrew Ross Sorkin during DealBook Summit 2022 when asked about the current and future state of venture capital, responded:
“that (investing in software with no due diligence) worked, but probably not going to work in the future because I don’t believe we need another food delivery company,…, more and more early investment is going to be fundamentally in decarbonization, it's going to be different science, it's going to require underwriting the science behind these entrepreneurs,…., all this money is not going to go to stuff that maybe provided us good utility to get food quicker or find a taxi sooner, but I believe it's going to be much more in hard science that requires a lot more technical understanding.”
TL;DR
• VCs cannot survive without proper due diligence;
• More money will be going to deep tech;
• Software cannot solve most of the tangible global problems;
• Most of what we need can only be done with hardcore science in the lab;
• A large portion of VCs are now incapable of touching deep science ventures and doing proper due diligence.
We ultimately need absolute tried and true field research to solve their problems and have a solution. Investing in deep tech can yield enormous rewards. Despite requiring significant investment, deep tech has the potential to introduce new markets, such as the projected $50 billion quantum computing market by 2030. The disruptive nature of deep tech presents both opportunities and challenges, as it can open up new markets while simultaneously destroying some existing market verticals.
Deep Tech is Resilient
During the last six months of 2022 (when VC activity dramatically decreased), deep tech funding only fell 9% from 2021, compared to the overall 45% drop in VC funding. According to Dealroom, European deep tech startups raised $17.7B in 2022. While that’s 22% less than in 2021, it’s still up 60% from 2020, making this one of the most resilient startup investment sectors. Apparently, after Planet Positive startups, European LPs are in love with deep tech as a promising VC investment.
Global Leaders are Investing in Deep Tech
In the U.S., the Inflation Reduction Act promises to put nearly $370 billion in federal funding behind the energy transition, which could spur a massive climate tech ecosystem. Tax credits and raw dollars for R&D are the main mechanisms climate tech startups can get funding for their solutions in the US.
France was struggling to turn scientific discoveries into innovations. It had a disappointing number of startups arising from research started the Deeptech Plan in 2019, which was a budget of €2.5B over five years to generate 250 deep tech startups a year. Between direct and indirect investments, through Bpifrance the government poured €1.6B into French tech startups and venture funds in 2022 and is now setting aside €3.5 and has a goal of generating 500 Deeptech startups annually.
In February 2023, Germany launched a €1B fund to invest in deep tech and climate tech companies. The German Fund, DTCF, will invest in sectors such as Industry 4.0, robotics, AI, Quantum, and automation with a focus on digital health, alternative energy, smart cities, materials and biotech.
The British government announced in March 2023 a new £360M plan to increase its investment in innovation to position the UK as a science and technology superpower by 2030.
Not Just Government Research
Throughout history, governments have played a significant role in advancing innovative technologies. However, they have primarily acted as a regulator and funders rather than an instigator. Recently, private sector investment in R&D has exceeded that of the public sector. Governments can still support deep tech through non-dilutive funding and alternative policy measures like tax credits.
A survey done by BCG and Natixis Explore Tech shows that big businesses want to monitor trends and keep an eye on promising technologies, even if no clear business application yet exists. As a result, 65% of respondents are working on proof of concept to incorporate deeper tech solutions into their operations. 30% of respondents expressed they are investigating deep tech solutions but have yet to develop use cases for projects. Big businesses are afraid to become obsolete, and the smarter ones want to build an edge and stay in business for longer, thus actively seeking deep tech solutions.
Business leaders, CEOs and VC investors must take proactive steps to stay caught up in the deep tech trend. Here is what I think must be done:
- Recognize that the deep tech wave is underway, driven by urgent societal challenges. Act swiftly and make required changes in your strategy to be able to explore investment opportunities, as delays can create barriers to entry.
- Mitigate risks and human challenges by adopting a step-by-step approach. Begin with hiring expert human capital. Be open to collaboration and pilot solutions. Move towards small-scale investments in deep tech startups.
- Assess the maturity and potential impact of individual technologies. Tailor your investment strategy based on your organization’s goals and timelines. Prioritize technologies that align with your long-term objectives.
- Leverage deep tech to address global environmental concerns. Explore ways to reduce your organization’s carbon footprint through circular solutions, energy-efficient practices, and sustainable materials.
- Certain areas of deep tech could always be extremely hyped. For example, Gen AI has become a huge hype in 2023, and while a lot of investments are going into such startups, it's extremely difficult to separate the wheat from the chaff. Having the right expertise and avoiding hype is extremely important in building a non-emotional system to adopt the deep tech.
In the dynamic landscape of deep tech, success hinges on proactive engagement, strategic decision-making, and adaptability. By taking these actions, CEOs and venture capital investors can position themselves to stay ahead of the curve and harness the potential of deep tech innovations.
