We are in the middle of a widespread evolution in which our economy stands to be enlivened by a parade of high-growth companies in new, data-centric sectors. These breakthrough inventions in science and engineering are characterized by extensive research and development times — and they are classified as “deep tech.”
Multiple industries (energy, logistics, healthcare, education, urban planning, etc.) are being reborn with the deployment of data intelligence systems crunching constant inputs from connected sensors, geolocation, and behavior meters. Data-centric deep tech is a once-in-a-generation chance — and investors should be paying close attention.
These startups can drive a paradigm shift with such rapid adoption that the technology can be noticeably perceived to transform the world around us. Here are a handful of examples of deep tech that shaped our world in a few short years:
· Personal computers
· Human genome sequencing
· The internet
· Smartphones
Looking ahead, here are a few examples of deep tech currently under development that could drastically alter the future:
· Self-driving automobiles
· Autonomous drone parcel delivery
· High-EQ virtual assistants
· Decentralized autonomous organizations
Great Rewards Come From Great Risks
The deep tech space frequently draws the attention of venture capital because a groundbreaking invention could hold the key to pivotal advancement in an industry, and backing a transformational startup early can be a gainful ride.
Pharmaceutical companies, software companies, and silicon chip manufacturers, for instance, have reaped significant gains over the past few decades by driving advancements in science and engineering. And global private investment in a handful of deep tech categories grew by more than 20% every year between 2015 and 2018.
However, investing in deep tech companies comes with unique risks. For example, most companies seeking deep tech VC funding are in early development stages — long before a prototype is made available to investors. Also, many investors lack the in-house expertise to appraise the potential of the underlying technology. As a result, deep tech startups rarely follow a common funding path.
Government-Backed Tech Clears the Way
Deep tech investing isn’t limited to the private sector. It might surprise you to learn that investments from the United States government have transformed many high-risk, capital-intensive industries. Through direct research and funding for scientific endeavors, subsidies and agencies have uncovered entire industries where only risk existed before.
By shouldering uncertainty in this way, government agencies can clear paths to subsequent private investment. The effects of such efforts are aplenty, even rippling through the most recent IPO flurries:
· Uber and Lyft greatly benefit from GPS (developed by the U.S. Navy).
· Pinterest is just one of the countless e-commerce applications that hinge on touchscreen technology (funded by the CIA).
· Widely used cloud software like Zoom would be nowhere without the internet (developed by DARPA).
Government investment goes toward science-based startups much more than you might think. Research grant funding — such as SBIR grants from the National Science Foundation — allows some startups to solidify their inventions before seeking private investments.
The U.S. government is a huge fan of Elon Musk, specifically. It’s so devoted, in fact, that support for his various endeavors nears $5 billion in subsidies — including a guaranteed loan of $465 million to Tesla, which is a heavy researcher of powerpack technology for grids, homes, and vehicles.
There are numerous societal benefits of the U.S. government leaving its mark on breakthrough inventions. It can define industry standards (cellular communications), codify transparency norms for technology usage (guardrails for artificial intelligence), and foster new growth sectors in the economy (the electric vehicle market).
In our new world of institutional entrenchment, the stakes of government-spurred innovation are rising. Institutional entrepreneurship can still be one of our economy’s most promising opportunity engines.
Shaping the Future
Because deep tech is marked by its potential to fundamentally change the world, getting in on the ground floor of a startup can offer enduringly outsized returns. The capability to transform, create, or reinvent industries can be a powerful opportunity — if it is captured.
Ascend Venture Capital has tapped into the emergence of the high-growth technology companies that are shaping the future states of industries. For more information, read our whitepaper, “Why Data Is Driving You.”