The enterprise capital market fell 38% last yr as investors continued to withdraw their funds, money became costlier and liquidity options dried up.
In such an environment, most would think that the technology sector most affected by the recession could be deep technologies – colloquially defined as cutting-edge scientific innovations that may create entirely recent industries. Due to the capital-intensive research and long time-to-market the product takes, it is often not attractive to investors in a down market where money is king.
However, after a significant slowdown in the first half of 2022, some of the largest deep tech sectors – also known as “frontier” and “hard tech” – showed resilience, although they remained in a difficult situation.
Total funding for quantum computing, space travel and robotics fell by only 24% in 2023 in comparison with the previous yr, based on Crunchbase data. In fact, the variety of funds has remained relatively stable over the last few quarters given the current state of the enterprise capital market.
Some of the largest rounds in these sectors include Hyundai engine AND hurry upis investing $787 million in a Seoul-based autonomous mobility company 42 dots; An artificial intelligence and quantum computing startup based in New York StudiopołuczneAQa $500 million raise; and a Houston-based business space station operator Axiom space raising $350 million.
“We have seen a slowdown,” he said Sean O’Sullivanmanaging general partner and founding father of w SOSV, an early-stage VC firm focused on the health of individuals and the planet. “It seems like a difficult time… But great things are happening quietly.”
The money keeps coming in
Investors in this space – which is broad and covers several sector areas such as biotech, manufacturing and climate tech – agree that while there has undoubtedly been a slowdown in investment, the breadth of deep technologies and the importance of the problems that come with finding solutions to them have created, that cash was flowing.
Adam Szarkawy — founder and partner at a Boston-based deep tech investment firm Material influencewhich focuses on several areas of deep tech, including material production and water and food suitability, said hard tech has turn out to be attractive to many founders and investors after the Covid pandemic shed light on several vulnerabilities it faces humanity.
“People really wanted to start working in deep tech,” Sharkawy said. “It really peaked in 2021, but by 2022 we saw a correction.
This correction has created a tale of two deep tech sectors, Sharkawy added – one area that is still trying to seek out the economics of value, and the other where true innovation and market fit have been found.
“Due to the uncertainty of 2021, there are certainly some areas that are over-financed,” Sharkawy said, including some artificial intelligence and quantum computing industries that have struggled to seek out a business aspect of their operations.
On the other hand, as firms increasingly focus on their footprint, there has been a renewed focus on sustainability and clean technologies. Technologies related to sustainable consumer goods, energy and manufacturing are of interest, as are various technologies for the clean capture not only of carbon but also other gases such as hydrogen and ammonia.
Artificial intelligence and deep technology
Of course, one segment that has all the time been associated with deep tech ventures is the one that dominates the entire tech industry – artificial intelligence.
While AI is increasingly getting used in non-high-tech areas – such as customer support chatbots – some investors are trying to apply it to high-tech areas to drive next-generation innovation in these industries.
Tara Stokesdirector at Point72 venturesstated that one of the more interesting elements of deep technology today is that firms are collecting unique and proprietary data sets to develop artificial intelligence in certain areas.
One example could be portfolio company Point72 Ventures Netradinewhich is attempting to use computer vision and data analytics to enhance fleet safety, she said.
“We are currently in a data transition phase,” Stokes said. “Right now, we’re looking for harder and harder-to-find data.”
The search for recent, proprietary data that may help make AI more efficient and useful, especially in deep tech sectors, stays expensive as investment in AI continues to soar.
Stokes said capital expenditures have increased as each computing resources and talent have turn out to be costlier. However, with it comes the time to introduce and commercialize some technologies
Not just VCs
In fact, the same is true in other areas of deep technology, as investors wish to see real-world applications, and those applications have turn out to be more urgent – for example in climate technology.
“There is a lot of interest in climate technology and there are a lot of near-term prospects in space,” O’Sullivan said.
The short-term prospects for customer ownership, revenue, and market fit may be difficult in many high-tech areas. For example, quantum computing technology has been in the works for many years and is still not easily commercialized.
O’Sullivan said the key to investing in deep tech is to have a balanced portfolio that features short-term bets and those that might occur several years down the road.
Another development that helped deep tech develop was the increase in interest from corporations and their VC affiliates.
“We found that corporations are very aggressive,” he said. “I think corporations have realized they prefer to buy rather than build.”
The growth in corporate investment is nothing recent, in fact, but CVC has exploded over the past two many years. While large biotech firms have all the time invested in their industry, more and more firms are now trying to enter various areas of advanced technology – especially climate technology, as many firms are forced to cut back their impact and find recent sources of energy.
O’Sullivan pointed to the Houston-based American oil and gas producer Western crude oilmade a major purchase of a deep climate tech startup for $1.1 billion Carbon engineering last August to assist it develop carbon capture sites, a good example of the rekindled corporate interest in the area.
While money could also be tight, that is not a bad thing, based on those involved. Deep tech may be difficult not only to take a position in, but to even understand its high level of science and engineering. This is likely why many individuals who got here to this space during the big spending period of 2021 have left the space and returned to other areas of SaaS and enterprise software.
“I think nowadays everyone wants to go to their happy, safe space,” O’Sullivan said with a laugh. “Specialization is difficult. There is a reason why professionals do what they do.”