Deep Tech Claims a 20% Share of Venture Capital, Surging Two-Fold in the Past Decade
New Research from BCG Finds That Emerging Technologies Are Now an Established Asset Class, with Almost No Difference in the Internal Rate of Return Between Traditional and Deep Tech Venture Funds
BOSTON—Deep technologies are technologies that aim to solve the world’s most complex problems such as climate change, food shortages, and disease. Today, deep tech claims a stable 20% share of venture capital funding, up from about 10% a decade ago, according to a new report and research from Boston Consulting Group (BCG).
The report, titled An Investor’s Guide to Deep Tech, outlines the deep tech landscape for investors looking to enter the field. Venture capital funding of deep tech fell from $160 billion in 2021 to about $105 billion in 2022 to $40 billion for the first half of 2023—close to 2020 levels. The drop roughly tracked the broader decline in venture funding that resulted from rising interest rates during this period. But the size of the average deep tech investment has significantly increased, 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).
“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.”
Challenges Facing Investors
As deep tech investing involves backing technologies that are still developing their underlying science, considering potential markets, and drafting business plans, these investments take longer than other tech investments to mature—an average of 25% to 40% more time between funding each stage from seed capital through Series D. These ventures are also at greater risk of failure at each stage compared with other tech investments. It is also not uncommon, especially for larger funds that start investing in the early stages, to participate in 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.
Four Main Areas Benefitting from Deep Tech Investment
BCG analyzed deep tech investments along two dimensions—technologies and use cases—in four areas of impact: climate and sustainability, demographics, technology, and security. Multiple technologies (such as digital AI, autonomous systems, and advanced physics and chemistry) and use cases (including mobility and logistics, energy and climate, and health and wellbeing) are attracting substantial shares. Cross-industry platforms, both physical and digital, are also popular funding destinations.
Countries’ Support of Deep Tech
The US and China lead the world in absolute share of deep tech funding provided, with more than 60% and 12%, respectively. Europe collectively has 14%. At the same time, BCG’s examination of deep tech funding as a share of GDP, shows that several nations—among them Israel, Sweden, the US, Singapore, and the UK—are aggressively trying to support deep tech development.
Determining a Clear Strategy
To invest in deep tech, investors need to start with a clear strategy that prioritizes the technology segments where they can build networks of expertise and partner ecosystem. The report outlines considerations for investors when prioritizing segments:
- 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.”
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