As we look back on 2023, it’s easy for venture capitalists to fixate on the year’s epic reset. Interest rates soared, startup valuations crumpled, the two leading VC banks collapsed, and limited partners recoiled. Everyone knew that venture would return to earth one day, and BOOM – here we are.
And yet … one notably resilient sector has been deep tech, despite its longer time horizons, novel technologies, and deep capital requirements. We know, because SOSV is one the most active deep tech investors in the world – in line with our mission to improve human and planetary health. The SOSV portfolio is not only standing up well, our programs at HAX and IndieBio are working with some of the best deep tech startups we’ve ever encountered.
By “standing up well,” I am not saying these are boom times. Our later stage companies are finding it takes longer to raise, and the results are often flat valuations and note-based rounds. There is a lot of uncertainty in the market. Our portfolio as a whole in 2023 went sideways in valuation, with some companies being written to zero and superstar gains making up for the write-downs. Even for firms like SOSV that have top quartile funds, these are sobering times. That said, we are cautiously optimistic about 2024 and bullish about deep tech in the long run.
Deep tech startups encompass many industries, though all are built on highly demanding engineering and scientific approaches that are often as risky as they are promising. Historically, that risk profile relegated deep tech startups to the periphery of venture investing, but that has changed quickly in recent years for two fundamental reasons.
First, climate. Venture capitalists have signed on to climate tech as both an existential mission and an essential arena with vast profit potential. As Bill Gates famously remarked at SOSV’s Climate Tech Summit in 2021, climate investing is likely to yield “8 to 10 Teslas” in the years ahead.
Climate tech cuts across literally dozens of sectors, from energy and transport to materials and agriculture. Most of the startups striving to reinvent carbon-intensive industries are applying new scientific and engineering concepts. Climate is a universe of deep tech investing all on its own, and an increasingly well capitalized one, with $142 billion raised in the past four years.
Second, fundamental science and technology breakthroughs are accelerating like never before, which in turn means deep tech startups have stronger foundations. Some of that momentum centers on AI technologies such as computer vision and machine learning across applications as varied as industrial robotics, drug discovery, diagnostic solutions, enzyme discovery, and enhanced manufacturing. It was less than two years ago, for example, that DeepMind’s AlphaFold2 revealed the structure of more than 200 million proteins, a 1000-fold jump in our knowledge of proteins that is having a huge impact on innovation in life sciences — opening doors and accelerating SOSV startups such as Prellis Biologics, Avalo, and Ten63.
The coming wave is a supercluster, an evolutionary burst like the Cambrian explosion… with many thousands of potential new applications.”
Mustafa Suleyman, co-founder, DeepMinds
In his 2023 book, “The Coming Wave,” Mustafa Suleyman, a co-founder of DeepMind and Inflection AI, captures this deep tech moment perfectly: “The coming wave is a supercluster, an evolutionary burst like the Cambrian explosion…with many thousands of potential new applications. Each technology … intersects with, buttresses, and boosts the others in ways that make it difficult to predict their impact in advance. They are all deeply entangled and will grow more so.”
At SOSV, we chase these technology “superclusters” in conjunction with what we call the “unstoppable megatrends” in human and planetary health. We are rooted deeply in the HAX and IndieBio hard tech and life-science themes, which draw on these accelerating breakthroughs, our vast human and planetary needs, and the attendant explosion of entrepreneurial opportunity.
We write pre-seed checks between $250,000 and $500,000 to 80 deep tech, climate and health startups each year, and then work with the founders in our HAX and IndieBio programs to prepare them to raise series seed and A rounds from top VCs. We do this by validating and extending their science and engineering, by sharpening their business models, and helping them find the best route to market.
It is no surprise that more and more founders’ trajectories combine elements of both SOSV’s hard tech and life sciences concentrations, and as a result they work across our programs, drawing on bio and chem labs, fabrication facilities and our teams’ expertise, as needed. RizLab Health, for example, a spinoff of the Nano Bioelectronics Laboratory at Rutgers University, worked with both HAX and IndieBio to build CytoTracker, the world’s first handheld, AI-based white blood cell counter, which eliminates the need for lab work to assess a patient’s white blood cell count – a huge innovation for clinicians.
At SOSV, we’ve been working hard to prepare for this coming wave. In just 16 months, we will have opened three remarkable new facilities for our founders.
We’ve been working hard to prepare for Suleyman’s coming wave. In just 16 months, we will have opened three remarkable new facilities for our founders. The story starts in January 2023, when we opened the 25,000 sq. ft. IndieBio NY office in Manhattan, complete with BSL (biosafety level) 1 & 2 wet labs. In November 2023, we opened the 20,000 sq. ft. IndieBio SF office on Third Street in San Francisco’s Dogpatch neighborhood offering BSL 1 & 2 wet labs, a chem lab, and a food lab.
And in March 2024, we will open a 35,000 sq. ft. HAX space in Newark, NJ complete with chem, mech, and EE labs as well as a wide array of fabrication equipment. Hand-in-glove with the HAX Newark team are engineering teams in Pune, India (also newly opened) and Shenzhen, China who help our founders with design engineering, prototyping, and sourcing.
In addition, our build up over the past 3 years has seen a tremendous strengthening of the staff at our locations. PhDs Susan Schofer at HAX, Sabriya Stukes at IndieBio NY, and Westley Dang at IndieBio SF joined the teams as chief science officers, and PhDs Stephen Chambers and Pae Wu joined our general partner ranks, along with Mohan Iyer, a biomechanical engineer and Genentech veteran.
We are grateful for the help in fueling these expansions: two $25 million grants, one each from New York’s Empire State Development and New Jersey’s Economic Development Authority. Our partners expect us to launch great companies, build workforces, and enhance the technology ecosystems on both sides of the Hudson. We think they made very good bets. Already, $150 million has been invested in the companies coming through these two new locations.
More than ever, it’s fair to say that SOSV offers deep tech founders a uniquely powerful blend of on-staff expertise, world-class facilities, and capital. On top of that, SOSV is the gateway to a vast syndicate of deep tech investors who have already invested in our portfolio companies.
You hear it said in venture circles that the best companies are born in the bottom of the venture cycles, and we already know that 2023 and 2024 will be amazing vintages, but the story won’t stop there because we expect Deep Tech to roll forward for many years to come.
In the here and now, SOSV – like all VCs – has to grapple with the new financial environment brought on by last year’s macro developments, namely the increase in interest rates that popped venture’s bubble. In the climate category, where SOSV is the world’s most active investor, 2023 brought a pause to climate investing as well, as new funding reached “only” $32 billion, a decline of 30% over the prior year, according to Sightline Climate. Given that the cumulative investment in climate tech went from $4 billion to $142 billion in just four years, and the number of climate-focused venture firms jumped from 50 to 350 over the same period, a correction comes as no surprise.
We fully expect that the climate category will roar forward again soon because it must for humanity’s sake, of course, but also because there are so many remarkable tailwinds, including the adjacent themes of industrial sustainability and reshoring US production capabilities.
It is SOSV’s investment thesis that our era will see widespread replacement of our “means of production” across many categories, from food to energy.
Part of that momentum comes from the Biden administration’s unprecedented boost for the manufacturing sector through new legislation like the Infrastructure Investment and Jobs Act, Inflation Reduction Act (IRA), and the CHIPS and Science Act. At the same time, since 2021, private industry has committed more than $500 billion to reshore American industry, which means vast new capital investment in production technologies that are likely to meet the tests of automation and efficiency, climate impact, and sustainability.
It is SOSV’s investment thesis that our era will see widespread replacement of our “means of production” across many categories, from food to energy, as we use technologies such as precision fermentation, for example, to re-invent food production, or deploy new types of biosynthesis to replace petrochemical-based products, or upcycle waste materials like polyethylene to make premium plastics. When you consider that $25 trillion dollars is spent on manufactured products every year globally, with another $20 trillion spent on energy and food, the possibilities are endless.
We have dozens of companies working across many consumer and industry categories, but one that illustrates what we mean by replacing the means of production is ZymoChem, which recently raised a $21 million Series A. ZymoChem uses renewable feedstocks to make a variety of high-performance, biodegradable polymers with near-zero CO2 emissions. Consider diapers. Right now, baby diapers are made with petrochemicals that degrade in landfills 400 years. With ZymoChem’s bio-based polymers, used diapers will biodegrade in just 90 days.
It’s revealing to note the other investors both on and off ZymoChem’s capital table. Joining the Series A round were three corporate VCs: Lululemon Athletica, Toyota Ventures, and GS Futures (Korea’s GS Group). Outside the round was a $4 million grant from the U.S. Department of Energy (DOE) as part of the DOE’s Industrial Decarbonization Roadmap. You could say that ZymoChem has caught the perfect wave of corporate interest in new manufacturing technologies and government support for innovation in the same arena.
Take it from me, there are many more ZymoChems to come. I have been investing in deep tech for 20 years, and I am confident that as the venture crash fades into history these times will be remembered above all for the new waves of technology that made our world a better place. Now, more than ever, is the time to invest.