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Deep Tech Investments Down, But Maybe Not As Much As You Think

Illustration of robot nesting doll. [Dom Guzman]

The venture market was down 38% last year as investors continued to reel back their funding with money becoming more expensive and liquidity options drying up.

In such an environment, most would think the tech sector most greatly affected by the pullback would be deep tech — casually defined as cutting-edge scientific innovation that can create brand-new industries. With its cash-intensive research and long product-to-market lead time, it usually is not attractive to investors in a down market where cash is king.

However, after seeing a significant slowdown through the first half of 2022, some of the biggest sectors in deep tech — also called “frontier” and “hard tech” — showed resiliency, despite still being down.

Funding numbers for quantum computing, space travel and robotics combined only dropped 24% in 2023 from the previous year, per Crunchbase data. In fact, funding numbers for the past several quarters have remained relatively steady considering the current state of the venture market.

Some of the biggest rounds in those sectors include Hyundai Motor and Kia’s $787 million investment in Seoul-based autonomous mobility firm 42dot; New York-based AI and quantum computing startup StudiosouthAQ’s $500 million raise; and Houston-based commercial space station operator Axiom Space scooping up $350 million.

“We’ve seen a slowdown,” said Sean O’Sullivan, managing general partner and founder at SOSV, an early-stage VC firm focusing on human and planetary health. “This feels like a tough period … But there are big things happening quietly.”

Money still coming

Investors in the space — which is broad and includes several areas of sectors such as biotech, manufacturing and climate tech — agree that while there has undoubtedly been a slow down in investing, the wide breadth of deep tech and the importance of the problems it is looking to solve has kept money flowing.

Adam Sharkawy — founder and partner at Boston-based deep tech investment firm Material Impact, which focuses on several areas of deep tech including material manufacturing and the suitability of water and food — said hard tech became attractive to many founders and investors after the COVID pandemic shined a light on several vulnerabilities facing humankind.

“People really wanted to start working in deep tech,” Sharkawy said. “It really hit a peak in 2021, but then by 2022 we saw a correction.

That correction has led to a tale of two deep tech sectors, Sharkawy added — one area that is still trying to find value economics and another where real innovation and market fit has been found.

“Because of the frothiness of 2021, you definitely have some areas that are overfunded,” said Sharkawy, including certain verticals of AI and quantum computing, which have struggled to find the commercializing aspect of the business.

On the other side, sustainability and cleantech has seen renewed focus as companies become more focused on their footprint. Technologies around sustainable consumer goods, energy and manufacturing are seeing interest, as are different clean capture technologies around not only carbon, but also other gasses such as hydrogen and ammonia.

AI and deep tech

Of course one segment that has always been related to deep tech ventures is the one segment that is dominating all of tech — artificial intelligence.

While AI is getting put to use in some non-deep tech ways — customer service chatbots, for example — some investors are looking to apply it to hard tech spaces for the next generation of innovation in those industries.

Tara Stokes, a principal at Point72 Ventures, said that one of the more interesting aspects of deep tech right now is that companies are collecting unique and proprietary datasets to push AI forward in certain areas.

One example would be Point72 Ventures’ portfolio company Netradyne, which is trying to use computer vision and data analysis to improve fleet safety, she said.

“We are in a transition with data right now,” Stokes said. “Right now we are looking for that tougher, harder-to-find data.”

Looking for new, proprietary data to help make AI more efficient and useful, especially in sectors related to deep tech, has remained pricey as AI investment has exploded.

Stokes said investment dollars have increased as both compute and talent have become more expensive. However, so has time to market and the commercialization of some technologies

Not just VCs

In fact, the same is true in other areas of deep tech, as investors want to see real-world uses and those uses have become more urgent — such as in climate tech.

“There is excitement about climate tech, and there are a lot of near-term prospects in the space,” O’Sullivan said.

Those near-term prospects of having customers, revenue and a market fit can be difficult for many deep tech areas. Quantum computing technology, for example, has been being worked on for decades and is still not readily commercialized.

O’Sullivan said a key to investing in deep tech is to have a balanced portfolio with some closer-term bets and some that can be several years away.

Another development helping deep tech along has been the increase in interest from corporations and their VC arms.

“We are finding the corporations are very aggressive,” he said. “I think corporations have come to the realization they’d rather buy than build.”

The rise of corporate investment isn’t new obviously, but CVCs have exploded in the last two decades. While large companies in biotech have always invested in their respective industry, now more companies are looking at different areas of deep tech to get into — especially climate tech as many companies are forced to cut their footprint and find new energy sources.

O’Sullivan pointed to Houston-based U.S. oil and gas producer Occidental Petroleum’s big $1.1 billion purchase of deep-climate tech startup Carbon Engineering last August to help it develop carbon-capture sites as a good example of the ignited corporate interest in the area.

While money may be down in the space, that may not be a bad thing, according to those involved. Deep tech can be hard to not only invest in, but understand in general with its high level of science and engineering. That is likely why many who came to the space in the big-spending days of 2021 have left the space and gone back to other areas of SaaS and enterprise software.

“I think in these times everybody wants to go to their happy safe space,” O’Sullivan said with a laugh. “Specialization is difficult. There’s a reason why specialists do what they do.”

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Illustration: Dom Guzman

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