UNION dispatch from #SFDeepTechWeek - Our <VC> Well is DEEP but Divided!

Right now, somewhere in El Segundo, California, a DefenseTech founder is dreaming up something with wings. Meanwhile, outside of Detroit, an experienced manufacturing team is launching a startup to improve human-to-robot collaboration. But the investors behind these very different DeepTech startups aren’t necessarily talking to each other.

With unprecedented interest in the category, DeepTech-focused startups and their investors seem to be everywhere these days including at the inaugural SF DeepTech Week June 23-29. But there is a growing schism in the sector between more Sci Fi-oriented investing and the Near Frontier funds that focus on what looks like SaaS but has sensors, science, and hardware.?

If we don’t bridge this divide and continue to ensure collaboration, we could risk losing the momentum that we’ve worked to build over the last decade.?

DeepTech Comes of Age

There is once-again a growing group of founders and engineers that want to actually solve real world problems, rather than create a social networking app or another white leather sneaker DTC business. And it’s working: a quarter of the billion-dollar exits in 2023 were in DeepTech (TechCrunch).?

Parallels can be drawn to the early days of the SaaS market or of Social/Mobile/Local. DeepTech is no longer the emergent venture thesis that it was ten years ago as our last startup August Lock was founded; it is now a major venture category with many $1B+ funds like Lux Capital, Founders Fund, DCVC, Khosla Ventures, and Eclipse Ventures, each with solid DeepTech pedigrees and all with new pools of capital.

Wen H. Hsieh, Ph.D. and Haomiao Huang, PhD recently raised $300M to start Matter Venture Partners, a HardTech-focused VC spin-out from Kleiner Perkins, one of the largest first funds ever closed (TechCrunch). Y Combinator also recently announced a fund focused on defense, space, and robotics.

So why now? Name your geopolitical pressure cooker - Russia vs. Ukraine, Israel vs. Hamas, People’s Republic of China vs. Taiwan; this uncertainty is driving a new wave of patriotism and American dynamism. There has been a corresponding rise in #DefenseTech, which was once seen as antithetical to the Silicon Valley ethos. Investors poured $108 billion into DefenseTech companies between 2021 and 2023 (Pitchbook).

As the Washington Post wrote on the burgeoning community of DefenseTech founders working from El Segundo near the likes of SpaceX: “Rearming the arsenal of democracy is in.” In addition to Defense, global priorities around Climate Change, Industry 4.0, and even how we envision our Cities, Homes, and Offices involve deeply technical solutions to mounting issues.

Deep But Divided

Investors have turned toward DeepTech as they’ve turned away from traditional venture markets, and in some cases even Consumer and Crypto/Web3. We’ve reached a "saying the quiet part out loud" moment where SaaS investing has matured to the point where there will still be great deals and amazing companies, BUT those deals will be very very competitive. I recently heard from a well known GP at a top-tier Sand Hill firm, “there’s simply not a lot of edge left in SaaS investing; it’s extremely price competitive with little asymmetric information.”?

DeepTech itself is maturing. It’s more linear than ever to create a hardware startup given more accessible building blocks plus a myriad of available manufacturing and compute/AI partners. According to Leo Polovets at Humba Ventures, DeepTech startups actually exit sooner, have similar levels of capital intensity, and even have a lower failure rate (Coding VC).

While the category is reaching mainstream consciousness, there appears to be several schools of thought around DeepTech investing (in addition to a variety of names for it, including HardTech, ToughTech, FrontierTech). We are seeing a mounting rift between those dreaming of the distant future, and those focused on what will sell tomorrow.?

During SF DeepTech Week, Union Labs Ventures hosted a private GP <> LP panel session that included Wen Hsieh from MVP, Bilal Zuberi from Lux Capital , Chris Douvos from AHOY Capital , Adam Draper ? from Boost VC , Julie Lein from Urban Innovation Fund, Sunil Nagaraj from Ubiquity Ventures, and Ian Rountree from Cantos and close to 100 Firm Founders and Limited Partners. This event only solidified the thoughts around how important and challenging this sector is. Most importantly, it highlighted the need for more collaboration in this space to ensure success.

Firms like Lux Capital, DCVC, and BoostVC are working with some of the most deeply technical founders to turn science fiction into science fact. In addition they have extremely compelling and aspirational content/events that have engaged a new genre of DeepTech entrepreneur. From Lux specifically, firm successes have included Auris, Recursion Pharma, and Matterport in addition to being at the cutting edge of AI and DefenseTech with investments in Hugging Face and Anduril.?

“The opportunity is always in the founders who seem to be obsessively ambitious,” says Adam Draper of BoostVC. “The opportunity is with talented people doing the hard things. The world is going to look drastically different in 15 years: hotel visits to space, breathing underwater. We will speak with animals and fly jetpacks powered by nuclear fission in our private nation states. We want to invest in founders who dare mighty things.”

On the other side of the spectrum are the Near Frontier funds, such as Ubiquity Ventures and E14 Fund, as well as many generalist Series A firms that see DeepTech as a necessary throwback to the communications infrastructure or networking investments of the 1980's - 2000's. These funds focus on areas like robotics, IoT, and advanced manufacturing. My fund, Union Labs VC, has found early momentum in these areas, bringing advanced tech to market in today's industrial and corporate landscape.?

Bridging the Gap

Ironically, technology advancements such as cloud computing and new hardware standards are bringing these camps ever closer together; what was once considered Sci-Fi is now much more accessible to the average founder.

But we must be wary of what Sunil Nagaraj of Ubiquity Ventures calls “moonshot culture”. Founders with this mistaken view may justify throwing out all the rules of minimizing risk when building startups, focusing instead on raising massive amounts of capital before they have a detailed plan (UBQT). Sunil sees this as a major risk for our thriving DeepTech ecosystem, and that there needs to be “a delicate balance between mainstream SaaS, deep tech and off-the-deep-end moonshots,” (TechCrunch).

More importantly, there are so many exciting DeepTech applications out there that we will need a variety of investing strategies and even extremely niche funds. Both DeepTech camps can generate returns for their proponents, and much like SaaS 10-15 years ago, there will ultimately be a wide diversity of theses out there. So there is no need for infighting or to trying to “out-PhD” each other. It is good for the industry to continue to differentiate and specialize - no one needs another fund that sounds just like all the others (and unfortunately what we learned on our panel from Chris @ Ahoy was that many many DeepTech funds certainly do sound alike!!).

In the end, DeepTech should be open and diverse. It will take founders and investors with a variety of skills and viewpoints to tackle the world’s most complex problems. Nothing great comes without great discourse, and given renewed interest in DeepTech, we will certainly see more of it.

Yet, we must rise above naming conventions, area codes, and cliques to collaborate and work towards the broader goal of supporting today's highly ambitious and technical founders. We can bridge the divide between today and the distant tomorrow, practical applications in industry and rockets to reach the stars.

We can then build the future together - whether here on Earth or on a planet far, far away.?