Should you be investing in the deeptech sector?

Phystech Ventures, a VC firm that has been investing in deeptech since 2013, has prepared a comprehensive analysis on the performance, main trends, and key players in the industry, titled the ‘Deeptech Outlook 2021’.

The large-scale study covers 10 sectors that investors have identified as the most promising areas in deeptech, offering breakthrough technologies, exciting growth numbers, and notable investment opportunities in AI/ML, quantum computing, cybersecurity, genetics, bioinformatics, neuroscience, food/agrotech, energy, mobility, and space.

Reputable industry sources show a four-fold rise of investments in deeptech between 2016 and 2020, while $60bn was invested in this sector in the last year alone. Growth in the number  of scientific papers in selected deeptech niches signals increased R&D activity.  This is mirrored in the fact that there was a 5% increase in protected IP filings in 2020, despite the pandemic.

Europe has so far published the largest number of scientific papers on deeptech, totalling 50,000 papers, and accounting for 31% of all total publications. This is then followed by the US, which accounts for 28% (35,000). In terms of funding, the USA and Europe have invested in deeptech at a 3 to 1 ratio. The UK currently leads Europe in deeptech investment.

“We see big changes happening across deep tech industries as a number of verticals are on the verge of major transformation. In the past 12 months the world has witnessed the first genome editing in a human, the first hydrogen fuel cell-powered passenger aircraft flight, and the first country giving the go-ahead to selling meat created in the lab. We believe in RnD heavy concepts, and science as a main driver of innovations that make a difference in many sectors,” says Petr Lukyanov, partner of Phystech Ventures. 

Investors predict that a new era of AI hardware is beginning now. Specifically, Phystech Ventures suggests paying attention to startups related to neuromorphic chips, as they provide 20 times more computing power than modern top-end GPUs. For cybersecurity, experts recommend focusing on projects related to holistic cybersecurity, post-quantum cryptography, and data privacy. More than 25.8 billion connected devices are now active as of 2021, representing about 35 billion potential gates for cyber attacks. 

The quantum computing market is expected to reach $7.3bn by 2025, with tech giants such as Google, IBM, and Alibaba all investing billions of dollars in quantum. The first quantum unicorns, IonQ and ArQit, were born in 2021. Phystech Ventures anticipates the growth of physical platforms, new types of qubits, and the development of high-level and end user software. 

Life sciences is one of the hottest niches, and also received an extra boost during the  COVID pandemic. The first gene-editing decacorns were born in the last 12 months: Intellia and CRISPR. Intellia also reported the first genome editing in humans in June 2021.

Moderna monetizes its mRNA delivery platform, with its company valuation consequently skyrocketing from $7bn in 2019 to $126bn as of now. Illumina, a bioinformatics company specializing in genome sequencing, is now valued at $70bn. Moreover, the cost per human genome sequenced has dropped 10 times in the past six years.

$100bn was generated from sales of neurological drugs and devices during 2020. Investors predict explosive growth in this area over the coming years, as neurological disorders are currently the second leading cause of death. 

Investments in foodtech are booming, especially within a rapidly developing niche of innovative food products, as consumers are increasingly questioning the provenance of their food. This is reflected in the fact that 75% of the funding in alternative proteins was raised in the past two years. Startups related to alternative proteins, cell-cultured products, and biomaterials are all of great interest for venture investments.

Alternative energy is also in the spotlight among investors. According to Phystech Ventures, $60bn of venture capital was invested in climate technologies in the period between 2013-2019, with an average annual growth rate of 84%. Hydrogen investment was a particularly bullish trend in 2020: Plug Power, which is engaged in the development of hydrogen fuel cell systems, showed a 10x increase in valuation. Hydrogen plane startup ZeroAvia, which Phystech Ventures invested in at an early stage, has closed several rounds with multiple highly notable investors, includings British Airways, Royal Dutch Shell, Bill Gates, and others. Investments in natural gas show the highest growth among both fossil fuels and renewable energy sources, demonstrating a +25.5% increase in 2021.

The robotized mobility market reached $50bn in 2020. This area includes drones, industrial robotics, and self-driving cars. The top three mobility deals in 2021 are Cruise, Joby Aviation, and Plus. Passenger air mobility startups alone have raised nearly $4bn through only the first half of 2021. In this sector, venture capitalists recommend focusing on drones, self-driving systems, multi-robot systems, and infrastructure. 

Another of these areas of focus is space, especially in regards to propulsion and de-orbiting technologies. Propulsion systems account for about 60% of all launch failures, and yet, no solution has yet been devised. In spite of this,  satellite launches into low orbits are simultaneously growing exponentially, with a 34% CAGR. Starlink has already deployed 1600 satellites, and has plans for another 12K. OneWeb is additionally intending to add 4800 satellites to low orbit, with Amazon adding 300. 

In conducting this study, industry deeptech experts consulted open sources, industrial reports and databases (Pitchbook, CB Insights, Scopus, Google Patents), etc. The investment activity was further evaluated by the Phystech Ventures team. The study was conducted in June-July 2021, and covered the development of deep technologies over the past 10 years.