OpinionInvestors no longer fear DeepTech
Opinion
Investors no longer fear DeepTech
“DeepTech can help save Israel’s hobbling startup ecosystem”, writes Doron Zauer, General Partner at Earth & Beyond Ventures
In recent years, DeepTech has surged to prominence within the world of technology innovation, delivering groundbreaking advancements in fields such as semiconductors, quantum computing, sustainable energy, advanced materials, and synthetic biology.
I am often asked what DeepTech actually is. There are many definitions, as the term encompasses a wide range of technologies. At its core, DeepTech refers to innovative technologies based on substantial scientific or engineering breakthroughs. Purists would even limit this to tech based on physical sciences (i.e., excluding AI), calling DeepTech by the nickname “HardTech”, referencing both the challenges inherent to DeepTech as well as the tendency for the end product to be hardware (as opposed to software). The “joke” (among DeepTechies) is that if a piece of technology can be developed by 20 engineers within one year, then it is NOT DeepTech.
But why do we even need DeepTech? Well, current technology infrastructure is not built to handle the expected complexity of technology applications and software of tomorrow, such as clean energy and Generative AI. So, cutting edge scientific innovation is necessary to lay the next generation of infrastructure which can break the physical barriers of today. Hardware advancements are crucial to enabling the AI revolution, with US hardware giant Applied Materials estimating that AI could consume up to 25 percent of global electricity if improvements in processing efficiency are not achieved.
DeepTech startups operate across sectors, for example, automotive pioneer Mobileye (sold to Intel for $15.3b), semiconductor designer Mellanox (sold to NVIDIA for $6.9b), and alternative energy giant SolarEdge (traded on NASDAQ for almost 10 years). DeepTech is a building block for many popular tech verticals such as ClimaTech and Homeland Security.
The buzz around DeepTech is real, and for good reason. However, the sector has traditionally faced significant hurdles that have limited its growth potential, such as difficulty in commercializing university research (where a lot of DeepTech originates), long and costly R&D cycles, the resulting lack of popularity from investors (in comparison to software), and a dearth of VC funds that specialize in DeepTech.
But in the past few years these challenges have lessened. AI is accelerating R&D, making development cycles shorter and cheaper. In fact, Mckinsey recently noted that despite misconceptions, DeepTech startups are not only achieving unicorn status more frequently, but are also demonstrating greater capital efficiency. Moreover, academic institutions, which play a pivotal role in both producing research that can be commercialized into DeepTech startups and nurturing young engineering talent, have established “tech transfer offices” to help transform their IP into commercial applications. In Israel, the government (mainly via the Israel Innovation Authority) provides significant funding and incentives for early-stage R&D, particularly those targeted at commercializing academic research.
We are already seeing momentum building. Not only are many new VC funds being established investing solely in DeepTech globally, major generalist VC funds such as Accel, Sequoia Capital, Lightspeed, and Khosla Ventures are increasing their allocation to DeepTech investments. This shift is significant: it means VCs are developing the expertise to assess these complex technologies, giving them the confidence to deepen their exposure to the sector. And the numbers speak for themselves - according to BCG, the DeepTech sector claims a stable 20% share of venture capital funding globally, a nearly 10% increase from the prior decade, reflecting its growing importance and potential. Crunchbase reported that while the entire venture market was down 38% in 2023 (compared with 2022), DeepTech only dropped by 24%.
Another major challenge facing the DeepTech ecosystem is attracting top-tier entrepreneurial talent, especially CEOs who not only understand the science but can also master business strategy, fundraising, and market positioning. To address this, both public and private sectors are stepping up with training and leadership development programs, including in Israel. More significantly, as we see more exits in the sector, startup talent is following. In fact, according to Crunchbase, a quarter of the US’s 16 unicorn ($1 billion) exits during 2023 were from DeepTech companies! The attraction of DeepTech is in part due to the high barrier to entry (compared to software) and its ability to effect real change in the world around us.
It has been widely reported that the Israel tech ecosystem is hobbling. This is due to a perfect storm combining a global economic downturn with a period of civil unrest fueled by public opposition to the proposed judicial reform and a multi-front war for the past year, with no end in sight.
However, many believe that increased DeepTech activity can help right the ship. Investment into DeepTech startups serve to train the Israeli workforce in core scientific and engineering skills, with positive knock-on effects on the tech ecosystem as a whole, further attracting precious foreign investment dollars into the Israeli economy. Many studies have shown the massive benefits of investment in R&D-intensive projects being disproportionately reflected in GDP and job creation, with some going so far as to show that R&D, as a key component of innovation, is the main driver of long-term economic benefit.
According to ECEPR’s 2024 Deep Tech Index, while 72% of leading DeepTech companies are based in North America, Israel leads the world on a per capita basis. This is no surprise - Israel, a known R&D powerhouse, invests 4.9% of its GDP into DeepTech, nearly double that of any other country, according to BCG. With world-class research institutions, the most Nobel prizes per capita by a huge margin, and amazing core technology developed for the defense establishment, Israel is uniquely positioned to drive DeepTech growth.
But we believe that this is just the tip of the iceberg. Once Israeli founders start taking the plunge into DeepTech, the sky is the (lower) limit.
The author is a Co-Founder & General Partner at Earth & Beyond Ventures.
