Popular in venture capital, there are both challenges and opportunities for investors
Solving the world’s biggest issues will involve, at least in part, an area of technology that is known as ‘deep tech’ and it’s now an established asset class according to new research.
Boston Consulting Group says that deep tech now claims a stable 20% share of venture capital funding, roughly double where it was a decade ago, as investors look to invest in these emerging technologies as potential solutions for global issues such as climate change, food shortages, and disease.
“Once confined to the domain of high-risk, high-return enthusiasts, deep tech has now migrated to the mainstream of venture funding,” said Antoine Gourévitch, a managing director and senior partner at BCG, and a coauthor of the report. “While requiring heightened levels of risk, capital, and patience compared with other asset classes, the markets unlocked by deep tech and the substantial returns realized by startups can be lucrative.”
Deep tech funding has suffered in recent years, along with the wider venture funding landscape due to higher interest rates. In 2021 investors piled $160 billion into the space, but a year later this was down to $105 billion, and for the first half of 2023 just $40 billion has been raised.
But the average size of investments in deep tech has increased significantly, with many now reaching $100 million or more. BCG analysis found that traditional and deep-tech-focused funds deliver similar unweighted internal rates of return (26% and 25%, respectively).
Challenges vs. opportunity
The challenges for deep tech venture investors include the duration for investments to mature, due to the nature of these emerging technologies that are still developing their underlying science, finding potential markets, and drafting business plans.
From seed capital to Series D is likely to take 25-40% longer in each stage than other tech investments, they are also at higher risk of failure, and are more likely to require multiple funding rounds. According to BCG’s survey of deep tech funds with more than $1billion in assets, an average of 42% of investments are multi-round.
However, the opportunities include diversification of portfolios and the return potential of being an early backer of technologies that could provide the answers in areas such as climate and sustainability, demographics, technology, and security.
Currently attracting high shares of funding are digital AI, autonomous systems, and advanced physics and chemistry with use cases including mobility and logistics, energy and climate, and health and wellbeing.
Strategy is key
The BCG report highlights five key factors that investors should adopt for their deep tech investing strategy:
- Disruptive Potential. Which use cases can the selected technology redefine? How quickly are startups growing in this area?
- Investment Possibilities. How full is the pipeline of available investments based on the number of startups in the field and the deals currently being done?
- Time to Value: How mature is the technology? What are the remaining technological risks?
- Existing Capabilities. Does the fund have the capabilities and resources to leverage in the field? If not, what capabilities does it need to build? What is the level of difficulty?
- Ecosystem. What is the level and type of involvement of other players, such as governments and institutions, in the financing of startups?
“Because deep technologies target large and intricate global issues that cannot be solved overnight, the need for advanced technology solutions will only increase,” said Jean-François Bobier, a BCG partner and a coauthor of the report. “Now is the time for investors to engage in the deep tech arena. Those who do not understand the opportunities and don’t learn the ropes are missing an excellent means of diversifying their portfolios.”