Eyeing Opportunities, Investors Begin Looking More Closely At Deep Tech

With every new SaaS enterprise platform seeing no end to funding and valuation increases, some investors seem to be looking to the next frontier—or frontier technology—for new opportunities.

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“We used to ask ourselves who will invest in this company after us, when we started,” said Peter Hebert, co-founder and managing partner at New York-based Lux Capital which specializes in deep tech. “Now there’s a cornucopia of options after we invest.”

Deep tech—also called “frontier” and “hard tech”—is the term coined for certain areas in sectors like robotics, life sciences and space that rely heavily on advanced scientific knowledge and engineering. Those in the industry say they believe a myriad of issues including COVID, climate change and increased global competition have elevated the space in many investors’ eyes.

“I’m not sure it is more competitive for investors,” said Chris Kim, founder and managing partner at San Francisco-based early-stage deep-tech investor Union Labs. “But there definitely is more attention being paid to the deep-tech space.”

A quantum shift

Since deep tech cuts through so many different—and large—sectors, it can be hard to point to one set of venture dollars to show trends in the area. However, one good indicator may be quantum computing, long associated with hard-tech investing.

According to Crunchbase numbers, investment in quantum computing—a level of compute much faster and at a level superior to classical computers that examines quantum states to perform computation—already has hit record levels this year as it seems poised to go above $1 billion in venture funding.

So far this calendar year, more than $728 million has been invested in the sector—already beating out the $515 million the space saw last year. These numbers include Palo Alto-based PsiQuantum’s $450 million Series D in July that gave the company a $3.1 billion valuation.

Investors seem bullish on what quantum could mean in areas such as financial services, security and life sciences.

“It’s something that will be needed,” said Peter Barrett, general partner at Palo Alto, California-based Playground Global, an early investor in PsiQuantum. “We know (the company) will have influence over our society.”

While quantum computing investment may show how deep-tech investing is ratcheting up, other sectors associated with hard tech have seen significant interest from investors as the private markets remain flooded with cash and everyone is looking at new—and sometimes overlooked—opportunities. From the exploding space tech industry to therapeutics, dollars continue to roll into these sectors.

Robotics is another good illustration. While the sector has grown well beyond its deep-tech roots of a decade or two ago to being more mainstream, investment capital in the science- and engineering-heavy sector continues to flow. Already this year has seen more investment dollars—$8 billion—than in any year past, according to Crunchbase data.

Why now?

While it is easy to say these different hard-tech sectors are seeing all-time highs due to the massive increase in venture funding everywhere, those who have invested in the space for years say recent events have cast more eyes to the area.

Not surprisingly, the COVID pandemic is one of those turning points.

“Broadly speaking, COVID has had an interesting effect on what people want to invest in and do with their lives,” Barrett said.

The pandemic has caused increased investment interest in life science and therapeutic companies, said Barrett, whose firm just completed its second investment in Cambridge, Massachusetts-based Strand Therapeutics; a $52 million Series A in June for the company which is developing a platform for the creation of mRNA drugs.

Others in deep tech also note the increased interest in life sciences. Lux deployed about 40 percent to 50 percent of its most recent fund into companies that Hebert describes as sitting at the intersection of compute and life sciences.

Matt Ocko, co-founder and co-managing partner at San Francisco-based DCVC, said his firm—which has been investing in different aspects of deep tech for more than two decades—has about three quarters of a billion dollars currently invested in computational biotech. DCVC was an early investor in next-generation therapeutic antibody developer AbCellera, which went public late last year.

COVID-related areas outside of health and life sciences, such as robotics and automation, also have shown popularity.

“People were interested in this area pre-COVID because it was cool,” Kim said. “The last two years, people see the need for hard automation through robotics” due to the disruption in the workforce.

Other areas like climate tech have been popular for more than a decade, but the deep-tech strategies around it have shifted and attracted new interest. While electric cars were popular a few years ago, now those in deep tech—and in a lot of other industries—are looking at other decarbonization technologies as the next frontier.

“You are also seeing a much broader interest here now,” said Thomas Lee, director of innovation at Union Labs. “It’s not just industrial interest, but consumer and retail.”

A little risky

While venture capital used to be associated with risk and having a unique vision, more and more money in the venture world seems to go to companies with a can’t-fail SaaS model and an ever expanding enterprise market. Deep-tech investing is different, and those who invest in it freely acknowledge the risk involved.

“We underwrite deep technical risk and deep clinical risk,” Barrett said.

“We have no idea about market risk,” he said with a laugh.

Barrett said he still sees large VC firms stay away at the early stages from many of the companies he looks to invest in, but that has no effect on the firm’s philosophy of investing against its technology road map.

“We look at things between the improbable and the impossible,” he added. “Why would I work on a social media app when I could be doing something worthwhile.”

Similarly, Kim said he came to the Bay Area during the first dotcom bubble in the late 1990s—which featured a much more simplistic startup ecosystem built mainly around the consumer market.

“I am totally uninterested in that today,” he said. “Part of the job of a VC is to take a risk. You have an opportunity to influence the world.”

Despite the risk, that doesn’t mean deep tech cannot provide returns, Ocko points out.

“When you save lives by the millions, you never run out of customers,” he said.

“It is very possible to be equitable to society and highly profitable for your investors,” he added.

Methodology

Robotics and quantum computing funding numbers include pre-seed, seed and all venture rounds.

Illustration: Dom Guzman