In a significant industry analysis, the latest Boston Consulting Group (BCG) report overturns established beliefs about the risk-reward ratio in venture capital investments in Deep Tech startups. Contrary to the widespread notion that higher risks lead to higher returns, BCG demonstrates that the returns from Deep Tech investments align closely with those from traditional venture capital endeavors, challenging the typical high-risk, high-reward narrative.
The BCG study meticulously examines the Internal Rate of Return (IRR) of Deep Tech-focused venture capital funds, supported by data from Preqin, Pitchbook and Dealroom, along with internal analysis, revealing a negligible difference compared to traditional funds. This finding, especially in the context of exits through acquisitions, IPOs, and PE buyouts, suggests a need to reassess investor expectations in this sector.
Diverse Deep Tech Ventures Landscape
BCG’s report highlights a diverse landscape of Deep Tech ventures, including notable startups such as OpenAI, Anthropic, Waymo, and Neuralink, which span domains from Synthetic Biology to Autonomous Driving systems.
In 2022, the venture capital funding for Deep Tech stood at approximately $105 billion, indicating strong but fluctuating interest in the sector. Despite a drop to $40 billion in the first half of 2023, Deep Tech’s proportion of the total venture capital market remained stable at around 20%, reflecting resilience amidst broader funding declines.
The landscape of Deep Tech investment encompasses various investor archetypes, such as “Genius Hunters” who focus on seed investments and Life Cycle investors who adapt their strategies to the evolving understanding of Deep Tech. This variety of investors supports the sector’s growth from early stages, where ventures grapple with scientific risks and prototype development, to later stages that focus on scalability and commercialization.
Growth, Challenges, and Global Impact
Deep Tech startups, as the report notes, typically require 25% to 40% more time to mature between funding stages compared to other tech investments. They also face higher risks of failure at each stage, with a significant proportion of investments in Deep Tech funds over $1 billion being multi-round. The report emphasizes the inherent scientific risks in fields like nuclear fusion and quantum computing, persisting from the lab to the growth phase.
Additionally, the report delves into how Deep Tech investments cover a broad spectrum of technologies and use cases across various impact areas. It points out that significant investment in cross-industry platforms, both physical and digital, is being attracted to these areas. This trend reflects the growing recognition of Deep Tech’s potential to drive transformative changes across multiple sectors.
The global distribution of Deep Tech startup funding, as segmented by BCG, also provides a revealing perspective. While the United States leads with over 60% of funding, countries like Israel and Sweden stand out for their relative investment intensity. The diminuative giant, Israel, despite its smaller economy, showcases the strongest commitment to the sector, as measured by Deep Tech startup funding relative to national GDP. This contrasts with the contributions of larger economies like China and Europe, which contribute 12% and 14%, respectively, demonstrating varied global approaches to nurturing the field.
Ultimately, BCG’s report challenges traditional views on venture capital in this domain. The report’s insights suggest a more balanced risk-reward scenario, reshaping how investors approach this burgeoning sector. This revelation not only informs current investors but also helps shape the future landscape of venture capital investments in the groundbreaking technologies that define the Deep Tech sector.
As the world grapples with pressing global challenges like climate change, health crises, and technological evolution, the role of Deep Tech startups becomes increasingly vital. BCG’s analysis, by providing a clearer understanding of the investment landscape, offers valuable guidance for investors looking to navigate this inherently complex, yet promising field.
