As global challenges become more intricate, the technologies designed to solve them must also evolve. This has led to the rise of "deep tech," an emerging area of investment that's quickly gaining traction among venture capitalists. But what exactly is deep tech, and why is it attracting so much attention? Let's dive into the world of deep tech to understand its potential, the risks involved, and the future it holds for investors.
Deep tech refers to companies and startups that focus on developing breakthrough technologies aimed at solving large-scale, global problems. These aren’t your average software or app companies. Deep tech ventures are built on scientific discoveries, advanced engineering, and complex technology that require significant research and development. The goal? To create innovative solutions for some of the world’s most pressing challenges, from climate change to healthcare.
Deep tech is rapidly becoming a hotbed for investment. In fact, deep tech investments have skyrocketed from $15 billion in 2016 to over $60 billion in 2020. This growth isn’t just about money; it's about the massive potential these technologies have to disrupt industries and create new markets. For instance, in the second quarter of 2021, out of 136 newly minted unicorns (startups valued at over $1 billion), one-third were deep tech companies. These firms are now valued at over $500 billion collectively, highlighting the enormous opportunity for investors.
While the financial potential of deep tech is clear, its societal impact is equally significant. Deep tech companies are tackling global issues like climate change, food security, healthcare costs, and the spread of new diseases. These are not problems that can be solved in a garage; they require collaboration across universities, governments, and private sectors. Deep tech ventures often rely on the expertise of PhDs and substantial government funding to make these solutions a reality. According to the XB100, 50% of top deep tech companies were founded by individuals with advanced degrees, and nearly half have received government support.
Deep tech isn’t just about cutting-edge technology—it's an approach. Typically, deep tech ventures are:
Investing in deep tech isn’t without its challenges. These ventures are highly technology-intensive, which means they carry significant technological and financial risks. While there’s almost always a market for innovations in clean energy or healthcare, the difficulty lies in actually developing these technologies. Deep tech companies often hold patents on their innovations, but turning these patents into commercial products requires heavy investment in R&D, engineering, and regulatory approvals. This process is both capital and time-intensive, making deep tech a high-risk, high-reward investment area.
Currently, most deep tech investments are concentrated in three main areas: synthetic biology, artificial intelligence, and advanced materials. These sectors alone accounted for 80% of deep tech investments in 2020. However, quantum computing is rapidly gaining attention, offering revolutionary potential in industries like pharmaceuticals, finance, and logistics. As the world becomes more data-driven, the need for powerful quantum computers is expected to grow, making this an exciting area for future investment.
Interestingly, deep tech investors aren’t just confined to Silicon Valley. While well-known firms like a16z, Kleiner Perkins, and Khosla Ventures are active in this space, other significant players are emerging across the globe. For example, Apex Ventures in Los Angeles focuses on deep tech in the medical field, while Cottonwood Technology Fund in Santa Fe invests heavily in optics, photonics, and advanced materials. Lux Capital in New York is another key player, investing in emerging science and technology ventures with the potential to disrupt entire industries.
The long-term success of deep tech depends not just on current investments but also on a society’s ability to educate and train its future innovators. Countries like China are investing heavily in STEM education to ensure they remain competitive in fields like nanotechnology, AI, and biotechnology. This focus on hard sciences is essential for any nation looking to lead in deep tech innovation. For investors, this underscores the importance of supporting educational initiatives that will fuel the next generation of deep tech entrepreneurs.
Deep tech represents the cutting edge of technology and innovation, addressing some of the most critical challenges of our time. While the risks are high, the potential rewards—both financial and societal—are immense. For venture capitalists looking to make a meaningful impact while also achieving significant returns, deep tech is an arena that’s worth exploring.