March 1, 2022
A fairly recent wave in technology that is still in its early stages, able to bring brand-new solutions that could further mankind to a whole new level
The world waited with bated breath as the best bio-scientists in the world were assigned the task of creating a vaccine efficient enough to be administered to the majority of the human population and lower the mortality rates caused by the novel SARS-COV 2 or Coronavirus, with the hopes of bringing everything back to normal, in as little time as possible. In another instance, recently, there is an increase in entrepreneurs who are entering the space industry. This involves sending rockets to the ionosphere, orbital launch rockets, and suborbital tourist spaceflights. Disregarding moral criticisms directed at these feats, this space race is bringing the world closer to more accessible space travel and has captured the public imagination. With the vaccine out in less than a year and successful aerospace missions, a focus is brought on humanity’s new capabilities for rapid innovation. Not only molecular biology and aerospace but significant development in diverse fields such as quantum computing, synthetic biology, climate tech, materials science leading to huge technological breakthroughs is expected. All these disparate groups of industries form a fairly recent wave that is still in its early stages, called Deep Tech.
A closer look at Deep Tech
According to the online startup-focused newspaper TechCrunch, Deep Tech is the generic term for technologies not focused on end-user services. It is defined by its combination of visionary ambition, fundamental research, and commercial pragmatism. Following on from the previous example, although companies like Moderna and Pfizer accomplished a great feat, they benefited from the work of many others, including governments, academia, Venture Capital, and big businesses. Deep Tech ventures bring together talents like engineers, scientists, and investors to develop brand-new solutions that could further mankind to a whole new level. This could include developing technologies to combat the looming crisis of climate change or building something as futuristic as flying cars/drones or synthetic biology to eliminate food insecurity and animal mistreatment. Consequently, these solutions require large R&D funding and can take years to develop their first prototypes. Most of the solutions are physical instead of software. There are many businesses that are developing technologically advanced solutions that are worth investing in. Flying cars, instant home delivery of essentials, a better connected world are some expectations that most people have and think of when imagining the future. Many companies in the Aerospace industry are producing drones operational in the specific sectors mentioned above that provide a huge investment potential while being good for the environment. There are also potential investment examples of products in development that can affect something as basic as the way we eat and dress. Cell-based leather or animal products offer an amazing opportunity as they provide the world with an alternative source of protein without affecting the quality and in turn, decreasing animal cruelty.
The ecosystem so far
While in the future we can expect more tangible breakthroughs to dominate several headlines, here are some important not-so-known milestones. The CRISPR-Cas9 genome editing technique was awarded the Nobel prize in 2020, while Crispr Therapeutics’ market capitalisation tripled to $11 billion. A language model that uses deep learning to produce human-like text called GPT-3 was released by OpenAI. Embryo-like structures from stem cells alone were made by researchers for the first time. This will help us understand how life as a whole came into existence while raising vital ethical problems.
On the whole, the amount of funding and activity in Deep Tech is undergoing an intense explosion. There was a 20% a year growth in global private investment in Deep Tech from 2015 through 2018. This number is exceptionally impressive given that Consumer Retail only had a 11% increase in global private investment from 2017 to 2018. According to Boston Consulting Group’s preliminary estimates, investment in Deep Tech (including IPOs, minority stakes, mergers and acquisitions, and private investments) more than quadrupled over a five-year period, from $15 billion in 2016 to more than $60 billion in 2020. However, this investment is unequally spread, with synthetic biology (56%), artificial intelligence (16%), and advanced materials (14%) industries forming around 86% of the total. Even though Synthetic Biology has a CAGR of 61% from 2016-2020 and is a rapidly growing technology segment, this
unequal distribution leaves only 14% of the funds for other industries. This is a missed opportunity given industries like Quantum Computing which grew at a CAGR of 115% from 2016-2020. Deep Tech funding is pretty unequally distributed also on a regional level. The U.S. comprises 75% of the total investment.
Keeping in mind the quadrupled growth, in reality, the global investment community has not yet taken up this opportunity. Deep Tech is still developing in a patchy and skewed fashion, and is considered a niche investment. The lack of initial investment in Deep Tech in comparison to other industries isn’t due to lack of dry powder, which is at record high levels ($1.1 trillion in Private Equity, $331 billion in Venture Capital, and $250 billion from Growth Capital). It can be mostly attributed to the lack of knowledge of the industries and the inability of companies to promote a product that will be ready for the market several years from today.
Future of Deep Tech and Trends
A Venture Capital firm, Draper Cygnus, sees an equity appreciation for the sector estimated in $50 trillion by 2030, due to different foundational Deep Technologies converging and reaching a level of acceleration that will likely create an immense amount of value and positive transformation in the world. This appreciation is equivalent to 5 to 10 times the wealth created over the last ten years by the current technology wave, as Draper Cygnus explains. Below is a list of some of the industries that most investors agree will be the face of innovation for the next few years.
- Quantum Computing. The Quantum Computing market is projected to reach $64.98 billion by 2030. The necessity of advancements in Quantum Computing is driven by the adoption of cutting edge technologies that tend to have their own processing and computing requirements like machine learning. Moreover, the energy required to sustain the current computer infrastructure is unsustainable.
- Space Industry & Connectivity. Research from Morgan Stanley shows that the general global space industry, which is at a revenue of $350 billion currently, can grow to a revenue of more than $1 trillion by 2040. This investment theme will impact industries such as Aerospace & Defence, TelCom, IT Hardware and Satellite Broadband internet access. Aerospace initiatives like communication, logistics and transportation drones, are already establishing themselves in the consumer market. They are also contributing to providing connectivity to remote locations, especially now with 5G expected to reach 80% of the global population by 2030, enabling new services, business models and customer experiences.
- Synthetic Biology. The global Synthetic Biology in agriculture and food markets is projected to grow to $14.12 billion by 2025, at a CAGR 34.56% from 2020 to 2025. AgriTech solutions moving away from the traditional farming practices to more sustainable practices and advancements, like development of cell-based meat/leather options, are urgently needed to combat issues like food insecurity, animal mistreatment and climate change. This technology can also be used in personal care, luxury fashion, industrial enzymes, pharmaceuticals, probiotics, nutraceuticals, and green chemicals industries.
- Energy & CleanTech. All companies innovating in Deep Tech need to be mindful of the sustainability of their products. CleanTech is one of the most important industries for the next few years, both financially and ethically. Currently, one of the biggest obstacles to the growth of the renewable energy industry is the lack of technology available for storage. Innovative startups are solving this problem by developing batteries and optimising them with Cloud-based technologies, renewable energy from clean sources and making nuclear energy safer.
- Artificial Intelligence. Companies are already annually spending nearly $20 billion collectively on AI products and services, leading to an impact on a multitude of industries like transportation, manufacturing, healthcare, education, customer service, etcetera. Maturing of AI will enable new applications, eliminate repetitive labour and support global reach of highly specialised talents and services.
- Healthcare & Life Sciences. Unsurprisingly, the health market is estimated to account for the biggest proportion of Deep Tech startups at 51% in 2020. This number and the unanimous growth prediction from investors of all kinds is undoubtedly affected by the pandemic. Application for Deep Tech within this field includes affordable medical devices, AI diagnosis, precision medicine, robot-assisted surgeries, at-home medical services and preventative care.
Why invest in Deep Tech?
Alongside Deep Tech investments bringing real impact by changing lives through the radicalism that the reach and applications of their solutions provide, successful implementation also promises high unprecedented return multiples for investors. This is because a competent business model of such a venture ensures the inherent power of its solution to create its own market or disrupt existing industries. It also provides the company with a valuable competitive advantage, since usually the underlying IP is either hard to reproduce or well-protected. Moreover, as mentioned earlier, the barriers to entry are often assumed to be quite high, due to the high R&D costs and the time it takes for a new entrant to reach the same level of market-ready maturity as an incumbent.
Due to the above reasons, more than the available financials, investors carry detailed technical due diligence, investigating the science behind the business model, to make sure that the team is able to actually execute the idea and bring the product to market.
There are, however, some issues associated with investing in Deep Tech. One of them is market risk. Since many companies seek to fund in the early stages of research, long before the development of a product or prototype, there are very few KPIs to evaluate traction and the financial health of the venture. Another issue that investors investing in a broad spectrum of industries face is a lack of specific in-house experts that can help accurately assess the potential of the technology behind the product. In line with a report called “The Deep Tech investment paradox” by BCG, 81% of Deep Tech ventures indicate that investors, on average, lack scientific or engineering expertise to assess its potential. They are uncomfortable dealing with unfamiliar technologies reducing their scope of investment. To mitigate this, new investors tend to analyse the value of patents, develop their own network of experts, collaborate with other key investors/companies who have the expertise to evaluate the technology or use incubators. In fact, big corporations play a huge role in validating products for the funds and as compared to Consumer Tech. In essence, sectors like Deep Tech require an elevated sense of intuition, knowledge and capabilities from the Venture funds themselves. Failure to invest in this sector and unequal distribution, though, not only risks capital missing the rewards of the next wave of innovation; it also risks slowing down the progress of humankind and our race against time to combat issues such as climate change. Thankfully, due to the increase in investment and the attention brought to this sector, we can encourage development and imagine a more technologically advanced and sustainable world sans the humanitarian issues that plague it today.