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As a venture capital company specialising in deep tech providing our investment outlook for the next 12 months is not as straightforward as many might believe. Simply because, rather than investing in market trends, the nature of deep tech means our focus lies on anticipating market demands two or more years away - which is an approach that means the deep tech companies we invest in are better positioned for subsequent funding rounds and eventual exits.
While sectors such as AI and clean tech are really appealing (and believe us, they will stay relevant – see our key focus below), if we saturate them with capital right now, the risk is they could find themselves disillusioned when they’re seeking follow-on capital later on. So, instead of predicting a 12-month investment outlook, our job is to identify the most promising investment opportunities further down the road - the trends which are not currently in the spotlight.
Supporting our approach is the transformation of the deep tech venture capital landscape. Deep tech now claims an increasingly significant share of global investment - according to Boston Consulting Group’s report: An Investor’s Guide to Deep Tech November 2023, deep tech now has a 20% share of venture capital, a significant increase from the 10% share a decade ago. This shift is not only indicative of the evolving investment trend; it signals promising prospects for addressing some of our most complex problems - food shortages climate change, energy and resource constraints, and healthcare.
Looking closer to home, the appetite for investing in deep tech is strong, with investments in the sector accounting for 49% of deals in the first half of 2023 as highlighted in PwC New Zealand’s Startup Investment Spring 2023 report. While this increasing interest is encouraging, it also prompts some key questions: how can we capitalise on this level of interest? And, how do we sustain investment rates to support the continued development of deep tech?
In this article, rather than sharing our thoughts on the next 12 months, we unpack a few key areas of focus for the Pacific Channel team – what we are considering when we evaluate potential investments with the ultimate aim of driving transformative change while delivering substantial returns for investors.
AI: Shaping the future ofdeep tech
For 20 years, Pacific Channel has been at the forefront of investing in deep tech. Over the past six years, we’ve observed our portfolio companies increasingly integrating AI into their deep tech solutions, emphasising AI's transformative potential to reshape industries and unlock new possibilities across various sectors.
From precision agriculture and personalised healthcare to advanced manufacturing and logistics optimisation, AI is driving significant value creation. Illustrating this are several notable examples within our portfolio.
- Showcasing AI's capacity to enhance regulatory compliance and mitigate risks in the financial sector, Transparently.AI is using the technology to find evidence of financial fraud.
- Similarly, Orbica harnesses AI to streamline geospatial analysis, making it more accessible and applicable for businesses to use in real-world scenarios.
- Exemplifying the application of AI in healthcare is Formus Labs. By leveraging proprietary AI models, Formus Labs integrates imaging data to enable orthopaedic surgeons to model a human joint before surgery, facilitating surgical planning and improved patient outcomes.
While generative AI systems, such as ChatGPT, which autonomously create new content, are familiar to many of us, prescriptive AI takes it a step further by optimising complex processes and decision-making in real time. This AI evolution has significant implications for companies in the deep tech sector – while it is already enabling our portfolio companies to enhance their processes and innovate at a faster pace, this is just the beginning. Over the next 10 years, we will see an unprecedented number of companies adopting AI.
However, despite its immense potential, the commercialisation of AI presents significant challenges, with cost being one major factor. This is why when we’re evaluating an investment opportunity, we prioritise a pragmatic approach, carefully assessing the company’s, and the team’s, ability to execute their AI-enabled technology.
Secular Growth Themes: Food, Health, and the Environment
Guiding our investment decisions and portfolio composition are secular growth themes: food, health, and the environment.
As the urgency of global challenges like climate change, resource scarcity, and public health crises continue to grow, so too does the demand for identifying companies driving innovative solutions that are capable of addressing these challenges. This is why our efforts are focused on identifying and supporting companies aligned with long-term sustainable development themes.
Notably, PwC, in their report, identified that within deep tech, 46% of all funding was attributed to health, 22% towards clean tech and agri-tech received 17%.
In the environmental and clean-tech space, in addition to generating sustainable energy and reducing greenhouse gas emissions, we see opportunities for low carbon mining, innovation to address the increasing demand for critical metals like lithium, as well as the significant potential within energy-storage solutions.
As our population grows, the pressure on our food and water resources escalates. With rising consumption levels, the issue of food scarcity is exponential. Addressing this requires innovative solutions centred around sustainable agriculture and alternative methods for extraction and water management – technologies that increase outputs using the same level of resources or using fewer resources to maintain current output levels will play a pivotal role in mitigating these pressing issues.
In healthcare, digital therapeutics, medical imaging and diagnostics all hold immense promise for improving patient outcomes, reducing healthcare costs and streamlining healthcare decisions.
Competitive Advantage: Deep Tech Development in Australasia
Our approach is to invest in areas where New Zealand and Australia have a competitive advantage. We’ve consistently highlighted that New Zealand, with a population of 5½ million people, a favourable regulatory environment and some very clever people, is an ideal hub for deep tech development. Similarly, Australia, larger in scale than New Zealand, offers a robust research and development ecosystem that attracts deep tech companies and investors.
Importantly, our focus lies in investing in technologies that can be deployed earlier in New Zealand or Australia compared to offshore counterparts. For example, New Zealand’s favourable regulatory environment for medical diagnostics and devices facilitates earlier trials and commercial sales, which in turn provides a global market advantage. This is just one example, there are many more.
To wrap up, limiting our investment outlook to 12 months presents challenges because looking forward, our strategy extends beyond short-term trends. By investing in technologies that we believe will shape the market landscape at least two years into the future, we remain aligned with our overarching vision. Central to this approach, and guiding our team’s focus are key areas such as AI, seculargrowth themes, and leveraging our competitive advantage.
