Everything You Need to Know About Investing in DeepTech

s global problems become increasingly complex, so too do the technologies required to remediate them. This reality is at the core of the emergence of an investing arena known as “deep tech,” which is attracting growing interest from venture capitalists. 

There are many potential definitions of deep tech but the definition adopted herein is an approach to developing and commercializing complex technologies utilized to address large, global problems with innovative business models. This is intrinsically very difficult but because the markets are global and vast, it is extremely attractive to venture capitalists who are always looking for a big payday. 

The trend of rising investment in deep tech is real and remarkable as it has more than quadrupled since 2016:

Deep Tech investments grew from $15B in 2016 to more than $60B in 2020

Deep tech companies are disproportionately represented amongst mega-valuation companies. For example, in the 2^nd quarter of 2021, the world birthed 136 unicorns, and among these only 5% are decacorns but 1/3 of the decacorns are deep tech companies that are collectively valued at over $500 billion. These are the kinds of valuations that get the attention of VCs.

WHY IS DEEP TECH IMPORTANT NOW?

While the commercial appeal of deep tech is undeniable, the social importance of deep tech should not be underestimated. There are a whole host of global problems emerging that require advanced approaches and deep tech provides the best path to solving the global problems of our age. These problems include climate change and sustainability; food preservation and waste reduction; global hunger; aging populations; rising health care costs; and the spread of chronic, non-communicable diseases along with new viral infections as human beings infringe on animal habitats. 

Solutions to these problems cannot be built alone in a garage but require a human capital and financial capital-intensive network of stakeholders with a commitment to hard science, robust engineering, and innovative design. This is why a foundational pillar of deep tech companies is the involvement of advanced degree holders and government support. 

According to the XB100, a prominent list of the top deep technology companies, 50% of deep tech companies were founded by PhDs, almost a third received government funding, and almost half of space, agriculture, climate change and quantum computing companies received government funding.

With these use cases in mind, it is important to note that deep tech is an approach and not just a suite of technologies. Generally, there are four attributes of deep tech ventures:

1. Problem-oriented, not just technology-driven. Very often they work on solving large and fundamental issues: 97% of deep tech ventures contribute to at least one of the UN’s Sustainable Development Goals.
2. Situated at the convergence of technologies (96% of deep tech ventures use at least two technologies, and 66% use more than one advanced technology); and approaches (advanced science, engineering and design)
3. Deep tech innovations are more oriented around the physical world than the digital one. 83% of deep tech ventures are currently building a product with a hardware component.
4. Deep tech ventures rely on a deeply interconnected ecosystem of actors, without which they cannot thrive. It is too complex to be developed in a garage. Some 1,500 universities and research labs are involved in deep tech, and deep tech ventures received some 1,500 grants from governments in 2018 alone.

Ironically, this general approach is focused on finding specific answers to several critical questions that venture capitalists typically ponder as they consider investment opportunities:

• What is the friction or problem that we are addressing? 
• How can we use science and technology to solve this problem in a better way that has not been used before? 

• Can we deliver this, outside of a lab? 
• What has been demonstrated so far? What will it take to go from prototype to production?
• Why now? Is the market ready for a solution to this problem?
• Are customers willing to pay for our solution?
• What needs to be true for this to work at scale?

The operative reality of deep tech is complexity: complexity of problems to be solved, complexity of technology; complexity of approach and complexity of risk. 

WHAT ARE THE RISKS WITH DEEP TECH INVESTING?

Deep tech is technology intensive which means that there is a high degree of technological and technical risk intrinsic to investment in these ventures. While mobile app and software companies take the risk of struggling to find customers for what they build, the opposite is true in deep tech. 

There will almost certainly be a market for clean energy and healthcare innovations but the struggle and inherent risk is in actually developing the capacity to build it. The dominant role of advanced technology development in deep tech cannot be overestimated. 70% of deep tech ventures own patents on the technology that they use in their business.

To develop defensible technologies, significant investments in research and development, engineering and design must be made to transform what is built in the lab into a commercial product. This is a process that is both capital intensive and time intensive which means that financial risk and time risk are inherent to deep tech. 

The capital-intensive nature of deep tech is driven by the fact that it takes time to build factories since deep tech is hardware-centric; significant amounts of money must be spent to purchase highly refined and expensive equipment and lab space; the imperative to make sure that the product has been perfected before use since an imperfect life science or energy product can be profoundly dangerous; the need to spend money and time to obtain regulatory approvals; and the reality that each new stage of development has significant new technical hurdles to overcome. The mantra of “the pioneers get the arrows, the settlers get the land” does not apply.

WHERE ARE DEEP TECH INVESTMENTS GOING?

At present, deep tech investments are highly concentrated in three areas—synthetic biology, artificial intelligence, and advanced materials—that collectively account for 80% of the total as of 2020.

Synthetic biology, artificial intelligence, and advanced materials are prime investment areas because they have enormous market potential in huge industries such as healthcare, construction and finance. 

But other areas are growing rapidly, particularly quantum computing which can create a new information technology that can have a revolutionary impact in important fields such as pharmaceuticals, manufacturing, finance and logistics. As data has become more and more central to our lives and as more and more devices emit data that must be processed, investors in deep tech are focusing more on the development of quantum computers to assist in addressing that need.

WHO ARE THE TOP DEEP TECH INVESTORS

Surprisingly, deep tech investors have escaped the over concentration in Silicon Valley that has plagued most venture capitalists. a16z, Accel Partners, Benchmark, GV, Kleiner Perkins, and Khosla Ventures are all traditional name brand, well-funded Silicon Valley-based VCs that actively invest in deep tech. 

But there are other venture capitalists outside of Silicon Valley that are having an impact in this space. Apex Ventures focuses on deep tech, particularly as it pertains to the medical field as well as 3D printing, AR/VR, and computer vision. They are a Los Angeles seed stage investor with investments in the $500K-$8 million range and notable investments include Kivu and Image Biopsy Lab. 

Cottonwood Technology Fund is a Santa Fe, New Mexico venture capitalist with a broad investment range ($1 million-$150 million) that is explicitly focused on investing in hard science and deep tech companies. Their core interests are optics, photonics, nano-electronics, advanced materials, climate tech, advanced manufacturing and robotics. 

However, CTF does not invest in software, AI, apps, cryptocurrency or consumer products due to a strict focus on IP-based startups and patent-based companies. Notable investments include mPower Technology, BayoTech, and BioFlyte. 

A prominent New York City-based deep tech venture capitalist is Lux Capital. It makes investments in the range of $100K-$100 million and its portfolio includes Eikon Therapeutics and Aeva. As a VC, Lux Capital is explicitly focused on emerging science and technology ventures and looks for entrepreneurs who “challenge the status quo and the laws of nature to bring their vision to reality through new scientific advancements, new technologies and new inventions that can rock their respective industries.” This growing decentralization of deep tech VCs is a healthy trend.

While deep tech is oriented toward solving society’s greatest challenges, long-term competitiveness in deep tech requires a society that is excelling at educating its citizens in the hard sciences, mathematics, and engineering. This in turn requires a strong, well-resourced K-12 educational system as students who do not become competent in these fields by the time they graduate from high school will miss the window required to go on to advanced study in college and beyond. 

China recognizes this which is why efforts like Ant Financial that would have contributed to the financialization of their economy were summarily shut down. The Chinese leadership, many of whom were trained as engineers, want Chinese youth to be studying mechanical engineering not financial engineering; they want them to be leaders in nanotechnology, artificial intelligence, biotechnology and robotics so as to develop solutions for a rapidly aging China that aspires for maximum energy independence; and above all else they want to continue to build an economy that is anchored in the real world. This is what is required to be competitive in deep tech and there is a lesson in this for everyone.