Evening Brief – 12.04.23
Deep Tech Claims 20% Share of VC
Deeptech now accounts for 20% of venture capital funding, up from around 10% a decade ago, according to a new report and research from Boston Consulting Group (BCG).
Emerging technologies are now a well-established asset class, with little difference in internal rate of return between traditional and deeptech venture funds.
Deep technologies seek to address the world’s most complicated issues, such as climate change, food scarcity, and disease.
The report, An Investor’s Guide to Deep Tech, covers the landscape for investors wishing to enter the space. Deep tech venture capital funding declined from $160 billion in 2021 to around $105 billion in 2022 to $40 billion in the first half of 2023, close to the levels seen in 2020.
This decrease roughly matched the overall decline in venture funding caused by rising interest rates. However, the average deep tech investment has grown in size, with several now exceeding $100 million. Unweighted internal rates of return for traditional and deep-tech-focused funds are comparable (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.
Deep tech investing takes longer to mature than other tech investments because it involves backing technologies that are still developing their underlying science, considering potential markets, and drafting business plans—an average of 25% to 40% more time between funding each stage from seed capital to Series D, according to the report.
These ventures are also more likely to fail at each level than other tech investments. It is also not uncommon for larger funds, particularly those that begin investing in the early stages, to engage in multiple investment rounds. According to BCG’s analysis of deep tech funds with more than $1 billion in assets, multi-round investments account for 42% of all investments.
The U.S. and China are the world leaders in terms of absolute share of deep tech financing granted, with more than 60% and 12%, respectively. Europe has 14%.