Deep tech innovations have the potential to affect billions of lives. Artificial intelligence, clean energy technology, life-saving vaccines — bringing these transformative inventions to the market requires a relentless drive for improvement and society’s boldest scientists and engineers. It also requires one further ingredient no deep tech venture can do without: capital.

A preliminary estimate by BCG found that deep tech investments had increased more than fourfold from 2016 to 2020, rising to over $60 billion. This estimate includes private investments, IPOs, minority stakes, and mergers and acquisitions. If deep tech continues on this trajectory, BCG projects that investments will swell to around $140 billion by 2025.

While all tech startups need venture capital investments, for deep tech, the need is even larger and more urgent. Deep tech innovations hinge on significant advancements in science and engineering, often combining several fields and redefining existing technologies to solve pressing societal problems. Before achieving commercial application, these ventures need time and a mix of public and private capital to fuel research and development (R&D) and eventually transition from early-stage start-ups to mature growth-stage companies.

Obtaining this crucial early capital is no simple feat. Governments, research labs, and universities often offer the primary modes of funding for deep tech experimentation, but as advancements move from bench to market development, there’s a funding gap. Though all may agree on the need for deep tech innovations once they prove viable, many private investors may still have trepidation about the value and risk of investing in emerging deep technology companies.

And yet, for the investor with vision and patience, deep tech has led to astonishing innovations like surgery-assisting robots and smart factories, which are transforming lives and societies all across the world, and delivering satisfying, if not, impressive ROI. In this post, we dispel the common myths about deep tech investments and examine the trajectory of this expanding industry.

Common Misconceptions about Deep Tech

Deep technology seeks to solve the world’s most urgent problems, from cancer to climate change. With these ambitious goals comes years of research, development, and testing before potentially life-changing inventions reach wide markets and societal awareness. However, these ventures run the risk of falling into the “valley of death,” lacking the necessary capital to evolve from prototyping to market validation.

Once we separate myth from truth, it becomes quite apparent that this growing investment class presents opportunity for not just large-scale investors (think major endowments, foundations, and pensions), but also for high net-worth investors and smaller institutions such as family offices or small foundations — with a desire to support and participate in ground-breaking technology solutions.

Myth 1: Deep tech requires too much capital to succeed.

Fact: The capital consumption of many successful deep tech ventures is comparable to that of non-deep tech startups.

In fact, non-deep tech ventures can sometimes consume even more capital than their deep tech counterparts. As examples, to date, non-deep tech ventures Airbnb and Robinhood have raised $6 billion and $5.6 billion in funding, respectively. Uber, another non-deep tech company, has raised $25.2 billion. Similarly, deep tech startups Nikola, Grail, and Impossible Foods have raised $3 billion, $2 billion, and $2.1 billion, respectively.

The true distinction between deep tech and non-tech startups, which this misconception hints at, isn’t the amount, it’s the timeline of deep tech’s capital spending. Deep tech’s initial development and validation period is longer than those of non-deep tech startups — and it’s also its highest net cash burn phase. Early R&D testing is where universities, governments, and research labs typically supply the vast lion’s share of funding. Private investment usually enters at a later stage, just before the venture’s growth inflection point for the go-to-market phase.

As with any investment, investors must minimize entry cost and maximize exit value. Once they hit the market, deep tech’s advancements in experimental technology and AI increase their value exponentially, enabling them to grow at a rate similar or possibly faster than non-deep tech startups. This period of rapid growth brings their cumulative capital usage in line with non-deep tech startups, even to the point of surpassing their value.

Myth 2: There are too few deep tech successes to matter.

Fact: Though deep tech investing remains under-marketed, there are numerous examples of successful deep tech ventures.

As of 2019, one out of every five unicorn startups is considered to be a deep tech startup. While many may associate deep technology with fields such as space exploration or bioengineering, there is a generous spread of deep tech startups across industries. Healthcare, energy, IoT (Internet of Things), computing, robotics, and the life sciences all host a number of deep tech ventures such as Auris, Envision, Nest, Graphcore, Nura, and Grail.

Deep technology can exist wherever science and technology offer solutions to societal problems — giving it the potential to influence every aspect of our lives. In fact, many people interact with the innovations of successful deep tech startups without knowing it. For example, a pioneer of wireless communication technology, Qualcomm, began as a deep tech startup in the 1980s. Once an R&D project, Qualcomm’s chipsets are now common in mobile devices — cell phones, tablets, laptops, TVs, and practically any device that connects to the internet. Today, the company’s IoT deep technology is used by billions and continues to drive the evolution of wireless protocols from 3G to LTE to 5G. Though deep tech innovations like Qualcomm may achieve significant market validation without recognition of their deep tech roots, this is a young but quickly growing segment of investments.

Myth 3: Deep tech ventures take too long to exit.

Fact: There are many examples of ventures that progressed from founding to acquisition within similar, or even shorter, timeframes as non-deep tech ventures.

Time-to-exit for deep tech ventures varies by company, as with startups in any industry. On the shorter end of time-to-exit examples, deep tech startups CTRL-Labs and Singular Genomics exited in 4 years and 5 years, respectively. Compare this to non-deep tech startups like Upwork and Zoom Communications that took 4 years and 8 years to progress from founding to exit. On the longer end of the spectrum, deep tech startups Oxford Nanopore Technologies and ThreatMetrix exited in 16 years and 13 years, respectively. That’s about the same as non-deep tech startups Airbnb and Roblox, which exited in 12 years and 17 years, respectively.

Exit timeframes are often tied to their industry sector. Certain ventures like those in the bio pharmaceutical industry take longer to fully commercialize due to extensive clinical and regulatory requirements. That world may be evolving soon. As we’ve seen with breakthroughs in COVID vaccines and blood cancer treatments, regulatory approval can be fast-tracked when the need and the proof of effectiveness are incontrovertibly compelling.

Myth 4. Deep tech delivers too low exit returns.

Fact: Exit returns for investors in deep tech often approximate those of investors in non-deep tech ventures.

Returns are top of mind for investors considering new investment opportunities. As with time- to-exit, deep technology valuations vary from venture to venture and depend on several factors: the stage of the company’s development, size of total addressable market (TAM), the business’s feasibility, industry or sub-sector multiples, and strategic value to acquirers.

In 2020, non-deep tech ventures Asana, Vital Farms, and Airbnb experienced exit valuations of $864 million, $204 million, and $3.5 billion, respectively. Likewise, in 2019, deep tech ventures CTRL-Labs, Beyond Meat, and Auris Health were valued at $1 billion, $240 million, and $5.7 billion, respectively, upon a liquidity event such as an IPO or merger and acquisition.

While this sampling does not represent the complete spread of startup exit valuations, these examples demonstrate the similarities between deep tech and non-deep tech startups many investors may not be aware of. High returns are possible for investors in deep technology depending on their entry and exit points. The selection of these points requires a comprehensive understanding of the correlation between the potential of the technology, business execution & risks, critical commercial milestones and the trajectory of enterprise valuation. In-depth knowledge about the correlation between these factors can make it easier to identify the period before a deep tech venture’s rapid growth.

The rising tide of deep tech investments

Since the 2000s, investments in deep tech ventures have been gaining traction every year. The rapidly expanding pool of capital investors further demonstrates deep tech’s growing relevance. In recent years, the output of deep tech innovations has revealed even more opportunities for problem solving through technology. For example, the convergence of disciplines like medicine and IT has driven increasing medical and tele-health innovations. Intersections of IT and manufacturing have enabled transformative warehouse and factory automation. As the continual identification of societal problems spurns more deep technology innovations, new opportunities for venture capital investments also arise.

With almost 75% of deep tech investments concentrated in the US, deep tech ventures around the world remain sorely in need of funds. For new investors, there are still plentiful opportunities for taking part in the journeys of these daring technologies.

Industry knowledge meets strategic capital

When it comes to deep technology venture investing, there’s a balance between getting in too early (and hence at a time of high risk as well as extended holding period) and too late (when returns are moderate). Identifying when to participate necessitates an intimate understanding of deep tech potential and the nuances for commercial and financial outcomes. Technically-savvy (specialist) investors are generally in a better position to make more informed decisions in earlier stage companies for several key reasons.

First, absent market validation and data, a specialist investor, through his or her technical and industry experience, can gauge the company’s technology potential, business trajectory, and future risks. Second, being deeply entrenched in a particular vertical, these specialists have built industry-specific networks that can better support a portfolio company’s developmental needs. For example, a specialist’s networks can aid in talent scouting, outsourcing service providers, customer acquisitions, and more. Everything else being equal, an early-stage startup founder would generally choose a specialist investor over a generalist.

While the debate over whether a generalist or a specialist investor offers greater returns is on-going, it is accepted that a deliberate portfolio and capital allocation approach towards both types is prudent. However, in technology-heavy sectors such as IT and healthcare (and in earlier stage companies where valuations are relatively lower), investors tend to lean towards specialists with a deep focus, industry knowledge, and the experience to drive optimum investment performance.

While still subject to execution risk like any other startup, deep tech ventures offer a wider class of investors the opportunity to take part in a growing movement — changing the ways people use technology, solving some of the world’s most complex problems, and reaping the potential financial rewards.