Investing in DeepTech has become a compelling opportunity for venture capitalists who seek groundbreaking innovations that can transform industries and address some of the world’s most pressing challenges. Unlike traditional tech startups, which often iterate on existing technologies or business models, DeepTech ventures are driven by fundamental scientific discoveries or engineering advancements. This difference presents unique opportunities and risks for investors, making it crucial to understand the rationale behind allocating capital to these kinds of startups.
What is DeepTech?
The term “DeepTech” has gained popularity over the past five years, characterized by innovations rooted in scientific breakthroughs or substantial engineering development. According to the Boston Consulting Group and Hello Tomorrow, DeepTech companies share several distinguishing features:
Groundbreaking Scientific and Engineering Innovations: These solutions are founded on original scientific research or meaningful engineering improvements, rather than on incremental changes to existing technologies.
Long Development Cycles and High Capital Requirements: DeepTech startups often require significant R&D investment, which translates into extended development timelines and larger capital needs.
Potential for Significant Societal and Industrial Impact: Their solutions address substantial challenges, such as climate change, healthcare, and energy sustainability, making the technology itself a valuable asset.
For instance, in the realm of artificial intelligence, the focus in DeepTech goes beyond leveraging existing models or platforms. The development centers on creating entirely new methods or technologies, which often necessitate a team of experts, including PhDs or seasoned researchers.
Why Invest in DeepTech?
1. Solutions to Major Global Challenges
DeepTech companies are uniquely positioned to tackle large-scale problems like climate change, healthcare deficiencies, and energy resource limitations. This orientation towards solving significant societal and industrial challenges can create tremendous value for both the startups and their investors. For example, companies working on novel materials or new energy sources can revolutionize industries by providing sustainable alternatives to existing technologies.
2. Intellectual Property as a Competitive Advantage
DeepTech startups often generate proprietary technologies that can be legally protected through patents, creating a significant barrier to entry for competitors. The intellectual property itself becomes a valuable asset, which can be monetized through licensing agreements, partnerships, or acquisition. In this sense, the IP acts as a “competitive moat” that provides long-term advantages.
3. Diversification from Traditional Tech Investment Cycles
The investment cycles for DeepTech are different from those of typical tech companies, providing diversification benefits for investors. For instance, while consumer tech may be closely tied to the latest market trends, DeepTech’s value is driven by scientific progress and long-term industrial demand. This uncorrelated nature helps mitigate risks, especially in fluctuating markets.
4. Strategic Investor Involvement
Many DeepTech startups attract strategic investors who see value beyond financial returns. Corporations may seek to invest for competitive advantage or early access to disruptive technologies. This involvement not only provides capital but also aligns interests with industrial partners, potentially accelerating the development and commercialization process.
DeepTech Returns
Data from McKinsey, based on Preqin’s analysis, suggests that DeepTech-focused venture funds deliver median internal rates of return (IRR) of around 16-17%, compared to the 10% median for typical VC funds. Furthermore, contrary to the belief that exits for DeepTech take longer, the timeline to liquidity events is not significantly different from other sectors. This suggests that while DeepTech requires a different risk tolerance and expertise, it can still achieve competitive, if not superior, financial outcomes.
Examples of DeepTech
Key DeepTech sectors that are garnering investor interest include:
Artificial Intelligence: Emphasis on fundamental advances in AI methods and new algorithmic frameworks.
New Materials: Development of materials with novel properties for applications such as energy storage, construction, and electronics.
Novel Energy Solutions: Innovations in sustainable energy generation, storage, and transmission.
Robotics and Automation: Advances in machine capabilities for industrial and service applications.
Quantum Computing: Exploiting quantum-mechanical phenomena for computing tasks that are intractable for classical computers.
Biotechnology: New approaches to drug discovery, diagnostics, and personalized medicine.
Conclusion
DeepTech presents a unique investment opportunity characterized by its focus on high-impact scientific and engineering innovations. The long-term potential for solving major societal challenges, combined with the defensibility provided by intellectual property, makes DeepTech an attractive category for venture capitalists who are willing to engage with the distinct risks and rewards. By addressing areas such as regulatory alignment, talent acquisition, and commercialization, investors can further enhance their approach to capturing the full value of this transformative sector.
The opportunities in DeepTech are vast, and a nuanced approach to navigating its ecosystem is key to unlocking significant returns while contributing to advancements that have the power to change the world.
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