As venture funding poured into nearly every sector last year from enterprise software to delivery apps, some investors started to take a deep and hard look at just that—deep, or hard, tech.
However, as venture investment continues its substantial pullback, the money that flowed into the area—known for things like quantum computing, robotics and space tech—in the past few years has begun to dwindle.
“I think there were a lot of funds looking for outside returns,” said Avidan Ross, founding partner of Root Ventures, a deep tech early-stage firm with nearly 80 investments. “There were a lot of people chasing [investments] last year.”
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Those who specialize in deep tech—also called “frontier” and “hard tech”—say there has been a leveling out of investors looking into areas that can still be years, if not decades, from the market.
“This is just a tighter period,” said Peter Hebert, co-founder and managing partner at New York-based Lux Capital, which closed nearly $1.5 billion worth of funds last year to invest in deep tech.
“There’s been a retreat by ‘tourists,'” said Hebert, meaning those investors who normally had not invested in hard tech and typically come in at later stages.
A drop in the numbers
Finding exact investment numbers in deep tech can be difficult since it cuts through so many different—and large—sectors. However, looking at a few specific sectors can be telling.
One such area—which took off last year—was quantum computing, a level of computation much faster and at a level superior to classical computers that examines quantum states to perform computation.
Last year, quantum startups saw more than $800 million in venture capital poured into the space, according to Crunchbase data. This year has been a very different story, with less than half that through nearly three quarters.
There have still been large rounds this year. For instance, in July, Finland-based IQM Quantum Computers closed a Series A worth approximately $126 million. However, last year Palo Alto, California-based PsiQuantum closed a $450 million Series D that gave the company a huge $3.1 billion valuation.
A more established sector of deep tech is robotics, which has seen an avalanche of funding through the years, but never more than last year. The space saw nearly $18 billion in venture funding in 2021—an all-time high—according to Crunchbase data. Thus far this year, less than half that amount has rolled into startups.
Perhaps surprisingly, in the robotics sector the same company that saw the two largest rounds last year, also saw the largest round this year. Autonomous driving startup Cruise closed two rounds worth nearly $2.8 billion in 2021, while also closing a round worth almost $1.4 billion in March of this year.
The decline in venture capital is on par with what the vast majority of the tech startup ecosystem is seeing. Those who invest in deep tech say a primary reason for the fewer dollars are investors who came into the area last year have moved back to where they feel more comfortable.
“I think there were a lot of people chasing deep tech last year,” Ross said. “The multiples on things like enterprise SaaS were so high, your conviction was not going to bring you a huge windfall” so they moved into hard tech.
Hebert added that deep tech investing also benefited from low interest rates in recent years—something that has changed substantially recently.
“Zero percent interest on something that is years from happening is attractive,” he said.
While many investors have retreated out of deep tech and are now taking care of their portfolio or looking at opportunities elsewhere, Hebert said there are still significant growth areas of deep tech.
“Climate tech has proven pretty resistant,” he added.
Hebert remembers back to 2008, when dollars became scarce for deep tech startups. Fortunately, many companies stocked up on cash in the last few years when times were good, he said, adding the vast majority of Lux’s portfolio took that approach.
“I think we are facing a consolidation of interest,” Hebert said. “For many large funds, deep tech is on the fringe.”
However, that consolidation may not be a bad thing.
“2021 felt like an aberration,” he said. “This feels more natural. People’s expectations are tempered and more realistic.”
Illustration: Dom Guzman
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