For many years, deep tech was an area most venture investors shied away from.

“Deep tech” has many different definitions but is generally recognized as technologies built upon meaningful scientific or engineering advancements. Examples include areas like leading-edge semiconductors, intelligent systems, robotics, cloud infrastructure, and others.

Startups in this arena, particularly those developing hardware technologies, were for a long time seen as higher risk, requiring more capital, and offering less potential for large profit margins and high-multiple exits.

Today, however, some of this sentiment is evolving as we witness the seismic technology shift driven by artificial intelligence. Semiconductor companies supplying AI data centers are dominating the public markets and AI chip startups are amassing eye-popping investment rounds. Innovative hardware technologies are suddenly the hottest commodity around.

In my decades of experience as an executive and investor in this space, I believe deep tech investing can indeed be a more challenging, nuanced area for successful VC investing and company building. But, this isn’t because of the reasons often assumed.

Since more capital seems to be flooding into this space today than ever before, I wanted to share the most common misperceptions I observe, along with some insights for entrepreneurs and investors to consider.

Myth #1: Deep Tech Requires More Capital

One very common assertion I hear is that deep tech investing requires more capital than SaaS platforms or consumer marketplaces. This is not necessarily true.

Yes, deep tech investing is fundamentally different from SaaS. One of the bigger contrasts is in their revenue and funding models. Deep tech companies are by definition built off of major technology advancements, meaning this type of startup may require a relatively longer time to develop a product, and the capital spent up front can be higher.

Comparatively, software companies can bring a first product to market and build revenue relatively faster, with a lower cost basis in their early stages. These companies may have uncovered a new marketplace or industry opportunity, but they are still working in a technological basis of software code that is well established and has become quite low cost to build with.

However, this early-stage cost differential can be misleading because SaaS companies very often end up spending a lot of money after product development to acquire customers. They can enter the market quickly, but that market is crowded and more difficult to find differentiation within; their challenge becomes all about winning and keeping customers. The upshot is that software investments wind up being equally as capital-intensive as deep tech companies, it simply skews later, sequenced differently and for different needs.

Myth #2: Deep Tech Doesn’t Generate Big Returns

The idea that deep tech can’t deliver strong multiples relative to other VC sectors is a misnomer. I think this view stems from the fact that it can take longer for deep tech companies to reach maturity as they develop a product and gain market traction in their early stages. However, while it may take longer before capital is returned, once the company reaches go-to-market readiness, deep tech companies have strong potential for a hockey stick effect. It may take five years to see a return, but the five years after that you can see exponential growth.

Much of this value creation is driven by the nature of deep tech products and their ability to have a large impact on their customer’s businesses. The focus on leading-edge technology development within deep tech intrinsically supports the building of strong IP portfolios, differentiated technologies, and creation of entirely new markets. If a product enables significant improvements to a customer’s revenue or margins, it can quickly blossom into an industry standard. These solutions have the potential to grow at a much faster rate than a software tool which will compete to grab market share and build incremental ARR.

In short, patience is key in deep tech investing, but the payoff can be as strong as any area of tech VC.

Myth #3: SaaS Tech vs. Deep Tech Investing

Deep tech sectors – semiconductors, for example – typically involve significant technical complexities, specialized ecosystems, and unique business challenges for customers.

Unlike many tech ventures at the software application layer, deep tech companies face hurdles like navigating entrenched industry structures, long sales cycles to earn buy-in from large enterprise clients, and justifying the cost of their high-value products. Savvy deep tech investors understand that success requires more than just a groundbreaking technology alone; it takes a comprehensive plan for market adoption.

Without the necessary domain expertise to understand these challenges, it’s incredibly hard to evaluate the potential growth or risk profile of a startup who might face them. It’s also very difficult to add any value to the company as an investor. Deep tech investing requires not only financial capital, but intellectual capital as well.

Intellectual capital is the guidance investors can offer to help anticipate and avoid mistakes, build strong businesses, and accelerate a startup’s growth. This is particularly prudent in the deep tech space, where first-time founders frequently come from a technical or academic background and benefit from the help of seasoned operators who know how to develop a business strategy and path to commercialization for a new technology.

I like to talk about the harmonics of growth. A startup’s path of growth is rarely a straight line. It goes up and down, down and up. The more you can synchronize the harmonics associated with that growth and avoid the ups and downs, the faster you get to success and the more amplified your success can be. Without this kind of support, progress doesn’t happen on schedule, competitors are perhaps able to catch up, investors lose confidence, and startups find themselves running out of money. The intellectual capital to help navigate this journey is crucial.

Because of these complexities, it’s very difficult to build a generalist-type investment firm and later make a strategic shift to enter deep tech investing. Many VC firms attempt to do so to take advantage of an emerging technology wave, but this pivot isn’t so easy.

Entrepreneurs are well-served to keep this in mind as well when choosing the right investors for their company. Ensure your core investor partners can not only offer financing, but tailored value-add expertise as well.

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