The world is obviously different than it was a year ago. The way we work and learn, the way we diagnose patients and pursue drug discovery, has been forever changed. At the heart of enabling these changes lies deep tech.
Deep tech companies use new scientific discovery or engineering innovation to create foundational technology disruptions that make what had been impossible, possible. The quickly evolving environment in 2020 rapidly accelerated innovations reliant on these deep tech foundations, causing broadband, hybrid cloud infrastructure, and digital biology to soar in value as the world reacted to a new way of life.
But the number of VC firms that understand the space has significantly shrunk due to shifts investors made decades ago. In the 1990s, venture capital was dominated by hardware, including semiconductors, PCs, servers, mobile phones, etc. The venture firms making these investments had significant domain expertise because the firms themselves were run by people coming from leading hardware companies.
As the first wave of venture capitalists retired, they were replaced by investors who pursued enterprise software, e-commerce, and SaaS companies of all kinds. Their investments were driven by two assumptions. The first is that hardware is capital intensive, and the second is that software with its much higher gross margins was not.
These assumptions were not as dramatic as expected. Hardware, while initially more capital intensive, became an outsourcing game. Products made by contract manufacturers like Flextronics and Foxconn reduced the capital intensity substantially. The same happened with semiconductors as they were outsourced to places like TSMC and other companies. At the same time, rather than being capital light, software turned out to require incredible amounts of money for sales and marketing.
The result? Average VC returns have slid continuously over the years. Venture capital used to outperform Nasdaq by a lot, then a little, and in the last five years its comparative performance has been negative.
At the same time, the buying universe for deep tech companies has exploded with demand coming from companies like Samsung, Intel, Qualcomm, Nvidia, and Broadcom, to name a few. In addition, traditional software and ecommerce companies (Microsoft, Amazon, Google, Facebook, Netflix, and others) have all jumped into hardware and cloud in a big way.
While many VC firms moved away from deep tech investment over the years, Celesta Capital has been rooted in deep tech since the beginning precisely because it’s the backbone of all technology innovation.
Our extensive portfolio includes many hardware and hardware-related businesses across industries such as AI/machine learning, next generation data and infrastructure, intelligence of things, and data biology/molecular diagnostics. Take the breathtaking performance of our portfolio companies Berkeley Lights and SambaNova as examples. They have turned groundbreaking deep tech innovations into market leadership in digital cell biology and semiconductors.
Demand driven by Covid-19 and other dynamics has fueled significant M&A activity for Celesta portfolio. It also resulted in the firm's strong performance despite this year’s challenging landscape. As one of the few VC firms successfully investing in deep tech from the beginning, our portfolio companies benefit from our intellectual capital, comprised of extensive business operations experience, technical expertise, and robust technology company relationships.
So, while much of the business world spent 2020 reacting to a barrage of new challenges by tweaking and repackaging existing solutions, Celesta Capital’s focus on deep tech allowed us to look past the noise and instead, spend time imagining the technology solutions the world will need tomorrow.