Why Deep Tech Is Eating Venture Capital
Venture Spending In Deep Tech
Marc Andreessen’s prescient assertion in 2011 that “software is eating the world” has been a guiding mantra for the tech industry. We now stand on the brink of a new era, and it’s becoming increasingly clear that deep technology, or “Deep Tech,” is poised to eat venture capital. In this blog, we’ll track venture spending in deep tech, its investment appeal, and possible venture trends in the sector. And for more insights, please sign up for our upcoming webinar on the topic.
REPORT AUTHORS
Matt Caspari
Managing Partner, Deep Tech FundMatt is a two-time venture-backed founder/CEO with a decade of startup operating experience. Before joining Alumni Ventures, he was an Investing Partner at Spike Ventures, where he participated in over twenty investments. Matt holds an MBA with a Certificate in Entrepreneurship from UC Berkeley’s Haas School of Business and a BS in Biochemistry from Georgetown University.
Esmanur Atasoy
Venture Fellow at Alumni VenturesEsma is a Venture Fellow at Alumni Ventures, who recently graduated from University of California, Berkeley Haas School of Business with an MBA degree. She spent last summer working at Cruise Operations team, focusing on scaling up and expansion projects. During her MBA, she worked with a number of startups on business development and market research projects. She held a part-time business operations role for over a year at Two Boxes, a seed stage return optimization startup. Meanwhile, she was also a part-time investment associate at Autotech Ventures. Prior to her MBA, she spent 3 years at McKinsey & Company, where she focused on new business creation opportunities as part of LEAP practice and AI deployment projects for major banks in the UAE and Turkey.
Returns to Match the Best Venture Investments
Deep Tech startups combine science and engineering to tackle the toughest and potentially most lucrative technical challenges facing the world. Companies in the deep tech space offer innovative and disruptive products with the possibility to reshape entire sectors and verticals — a key reason why one in five unicorns is a deep tech company.
Today, Deep Tech investing represents ~20% of venture capital funding. That’s up from ~10% a decade ago, according to BCG’s An Investor’s Guide to Deep Tech. Further, the report notes, “Emerging technologies are now an established asset class — with the returns to match the best venture investments.”
Deep Tech Has Become an Established Asset Class, Accounting for a Stable 20% of Venture Capital Funding
Sources: Dealroom; BCG analysis. 1Includes all companies worldwide that have completed Series B financing and subsequent rounds, accounting for more than 90% of total funding.
Deep tech investments cover a wide variety of industries, many of which are growing rapidly. For example, the U.S. defense budget was worth $818.8 billion in 2023, which was a 10.7% rise from the previous year. This is in response to the deteriorating global security environment impacted by the Russian invasion of Ukraine and continued tensions with China over territory in the South China Sea and wider Indo-Pacific. Numerous geo-strategic and domestic political imperatives continue to drive U.S. expenditure as defense capabilities gain growing political importance. The country’s defense budget is expected to grow at a CAGR of more than 2% during 2024-28.
As countries turn to renewable and clean energy, that industry too has seen incredible growth and is projected to reach $1.9 trillion by 2030.
To address computing challenges, innovations in semiconductor technology ($500 billion global market) and data storage ($60 billion market) will be required.
These are just three examples to show that the demand for science-backed solutions to complex problems is at an all-time high. And we expect it to continue to rise.
Learn More About the Deep Tech Fund
We are seeing strong interest in our Deep Tech Fund. If interested, we recommend securing a spot promptly.
Investors in the fund will own a portfolio of high-tech game-changers and disruptive business models using advanced science and engineering to tackle the toughest and potentially most lucrative tech challenges.
Max Accredited Investor Limit: 249
Building Software Startups With Little to No Venture Capital
The advent of AI and cloud computing are predicted to dramatically lower the cost of building new software businesses. We anticipate a pivotal shift: The emergence of solo entrepreneurs (42 million solopreneurship in the U.S. by 2026) and small teams capable of scaling businesses at unprecedented speeds and with minimal financial resources.
Sam Lessin from Slow Ventures points out the fact that entrepreneurs are gaining the ability to create fundamental value with little or no capital, using their expertise, their community, and new technology available to them:
$1B Seed Backed ‘Small businesses’ FTW:
It has never been easier for super small lean teams to build serious businesses with extreme capital efficiency and getting profitable early.
”There will be more software and community-driven ‘billionaire’ founders of tightly held companies in the coming years than ever before & seed investors are ideally positioned to provide the single ‘shot’ of high risk capital for liftoff and do very very well backing these shots. The democratization of technology development challenges the traditional requirement to raise significant amounts of venture capital. This will redirect venture capital dollars from software investments to investments that require a higher amount of outside capital – such as deep tech.”
— Sam Lessin, The State of VC in 2023
The democratization of technology development challenges the traditional requirement to raise significant amounts of venture capital. This will redirect venture capital dollars from software investments to investments that require a higher amount of outside capital — such as deep tech.
Deep Tech’s Investment Appeal
Deep tech sectors such as space exploration, advanced material science, and renewable energy technologies typically require significant capital investment while offering the potential for substantial returns. Iconic recent examples of successful deep tech companies include SpaceX, Palantir, Anduril, and Tesla — all of which disrupted their respective industries while delivering massive financial returns to their early investors.
BCG’s An Investor’s Guide to Deep Tech stated, “Our analysis of about 1,100 venture funds shows that over the past five years, the weighted average internal rate of return was 21% for traditional venture capital investors and 26% for deep tech-focused funds.” The report also noted that “Investors that do not understand the opportunities of deep tech, which are significant, and learn the ropes, which can be complex, are missing out on attractive returns and an excellent means of diversifying their portfolios.”
Jordan Nel’s analysis from his substack underscores the opportunity. “Historically, deep tech has received 7-10% of global venture. The ±120 sector unicorns minted from this have produced ±$463bn in aggregate value, with a rough time to IPO of 5-10 years. CB Insights has it that there are roughly 1200 VC-backed unicorns in total from the last 20 years and, depending on what you consider deep tech, anywhere from 120 to 350 of these unicorns fall under that bucket. So, butchering nuance, 7-10% of venture has been responsible for 10-30% of the unicorns.”
Add to this the recent move by Susa Ventures — a leading seed-stage VC that invests in traditional sectors like enterprise SaaS, fintech, healthcare, and logistics — to launch a new deep tech focused fund, Humba Ventures. After conducting a detailed analysis of venture data, Leo Polovets GP at Susa and Humba, concluded “deep tech is the best place to invest and build right now.”
Polovets also blew up misconceptions about deep tech investments in his blog “Betting on Deep Tech.”
He found that deep tech companies…
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Do NOT have poor outcomes vs. other sectors
Polovets cited numerous industries and specific companies that clearly told the opposite story, with many $1 billion deep tech exits — plus sectors like industrial automation which are ripe for disruption. - Home
Are NOT much more capital intensive
Polovets found it was a wash between deep tech and other sectors when it came to capital needs. He pointed out that access to grants, less competition for new customers, and bigger contracts likely benefited deep tech startups. - Home
Do NOT take much longer to exit
Again, Polovets’ data indicated that traditional companies take on average 8 years to exit, while deep techs needed just 7. - Home
Do NOT experience much higher failure rates
Polovets again saw evidence to the contrary. “Companies in areas like defense, space tech, and life sciences have 2%-5% odds of having $250m+ exits, while companies in categories like SaaS, Fintech, and AI/ML have 1%-1.5% odds.”
Deep Tech Challenges & Opportunities
Data on venture capital allocations reveal a compelling narrative. While software and internet services continue to attract substantial investments, there’s a noticeable pivot towards deep tech sectors. This shift reflects the increasing recognition of deep tech’s potential to address some of the most pressing challenges of our time, including climate change, energy sustainability, and global health crises.
BSG’s chart captures some of the challenges and opportunities that deep tech could address:
A more detailed breakdown of 2023 venture investing below also shows the top 10 investment areas for VC dollars, with seven falling under the deep tech investment category — with sustainability being the top investment area.
Tom Chi, founding partner of At One Ventures, a VC firm investing in deep tech to tackle the largest drivers of climate crises with a $375M fund, handpicks the industries and technologies he would pay attention to. Their portfolio involves several deep tech companies serving agriculture, energy, ecosystem, and construction industries.
The Future of Venture Capital: Embracing Deep Tech
Looking ahead, we think the next decade promises a significant realignment of venture capital priorities. The challenges and opportunities presented by the physical world — from climate technology to biotechnology and beyond — necessitate substantial capital injections. Deep tech ventures, characterized by substantial risk but equally high potential for societal impact and financial return, are likely set to constitute the majority of venture capital investments.
The implications of this shift are manifold. First, venture firms will need to recalibrate their expertise and networks to effectively support and scale deep tech ventures. Second, the criteria for investment will evolve, with a greater emphasis on interdisciplinary innovation and long-term societal impact. Finally, this transition signals a broader change in the entrepreneurial landscape, where success is increasingly defined by the ability to harness technology for tangible, real-world solutions.
Agents of Change
As deep tech continues to “eat” into the venture capital space, the contours of investment and innovation are being redrawn. We believe the coming decade will not only witness a surge in deep tech ventures but will also see venture capital evolving to meet the demands of a world that increasingly looks for technology to solve its most intractable problems. In this dynamic landscape, the VC community has a pivotal role to play, not just as financiers, but as catalysts for sustainable, impactful change.
Learn More About the Deep Tech Fund
We are seeing strong interest in our Deep Tech Fund. If interested, we recommend securing a spot promptly.
Investors in the fund will own a portfolio of high-tech game-changers and disruptive business models using advanced science and engineering to tackle the toughest and potentially most lucrative tech challenges.
Max Accredited Investor Limit: 249
This communication is from Alumni Ventures, a for-profit venture capital company that is not affiliated with or endorsed by any school. It is not personalized advice, and AV only provides advice to its client funds. This communication is neither an offer to sell, nor a solicitation of an offer to purchase, any security. Such offers are made only pursuant to the formal offering documents for the fund(s) concerned, and describe significant risks and other material information that should be carefully considered before investing. For additional information, please see here. Venture capital investing involves substantial risk, including risk of loss of all capital invested. This communication includes forward-looking statements, generally consisting of any statement pertaining to any issue other than historical fact, including without limitation predictions, financial projections, the anticipated results of the execution of any plan or strategy, the expectation or belief of the speaker, or other events or circumstances to exist in the future. Forward-looking statements are not representations of actual fact, depend on certain assumptions that may not be realized, and are not guaranteed to occur. Any forward-looking statements included in this communication speak only as of the date of the communication. AV and its affiliates disclaim any obligation to update, amend, or alter such forward-looking statements, whether due to subsequent events, new information, or otherwise.