DCVC DTOR 2024: A few words on the investing climate

How are we putting our funds to work to realize the ambitious goals spelled out in this year’s Deep Tech Oppor­tu­ni­ties Report? And why are we convinced, at an intel­lec­tual and a gut level, that DCVC’s approach to deep-tech investing will bring venture-scale returns while nurturing companies that change the world?

Like the companies in our portfolio, we’re closely attuned to data. So let’s look at some numbers. Venture capital continues to be the highest-performing private capital asset class, as it has been almost every year since 2013 (the exceptions were 2016 and 2022). But venture activity has dropped off signif­i­cantly since 2021, when U.S. venture firms invested a record $348 billion. Amid inflation, geopo­lit­ical tensions, and a sclerotic market for public exits and acqui­si­tions, total U.S. deal value fell to $242 billion in 2022 and $171 billion in 2023.

In some ways, this pullback is both expected and welcome. At 2021 levels, too much money was pouring into companies that lacked the funda­men­tals they would need to thrive. Valuations soared to levels these firms couldn’t support through revenue growth, making it harder for them to raise follow-on rounds. Now, with overall investment down, demand for capital is once again outstrip­ping supply. That gives venture firms more leverage to keep valuations and deals to reasonable sizes, which is better over the long haul for both founders and investors.

We do anticipate another kind of consol­i­da­tion in the near future. The number of venture firms in existence has more than tripled since 2007, and total dollars they manage has sextupled. A growing number of those firms now invest in deep tech; Boston Consulting Group counts about 800. We see that as a plus, since it means we have more potential co-investors for compelling deals. But when more venture firms chase a fixed supply of good ideas, their average returns plummet, in terms of multiples on invested capital. So it wouldn’t surprise us to see a dramatic contraction in the venture industry echoing those that followed the bursting of the dot-com bubble in 2000 and the Great Recession that began in 2007. Fortunately for us, times of contraction are exactly when the larger, more experienced, deeper-pocketed venture firms can shine — connecting portfolio companies with the capital, syndicate support, industry-veteran operating partners, marketing strategy, and early customers they need to succeed.

In 2024, one intriguing data point is that even as the amount of venture capital going into the deep-tech sector has fallen, the median post-money valuation for concluded deals continues to hold steady or rise slightly. A big part of what’s going on here is that funds are exercising more care in deal selection, meaning that the winning companies are stronger and merit larger investments per round. Here at DCVC, we’re happy to lead or participate in a large round at a reasonable valuation—if our own techno-economic analysis shows that a startup has the team and the technology needed to deliver, as well as a clear path to profitability.

Which leads us to one last point. The companies we back are working on fundamental deep-tech break­throughs that will scale in a linear way to take over existing markets and build new ones. They’ve found simple, cost-effective, climate-friendly ways to replace or expand resources vital to our economy or our health.

One great example is Fervo Energy, which is repurposing sideways-drilling and hydraulic fracturing tech­nolo­gies from the oil and gas industry to unlock previously inac­ces­sible sources of geothermal energy. After success­fully bringing online its first commercial plant in Nevada, the company is now on a rapid learning curve, drilling each new well more quickly and cheaply than the previous one. The big technical hurdles have been cleared, and the company’s job is now simply to replace as much of the nation’s fossil-fueled electrical generating capacity as possible with renewable, firm geothermal power.

They’re a typical DCVC company in that they have an industry-leading team applying a brilliant but straight­for­ward engineering insight to create a product that can immediately help to solve a trillion-dollar problem (or more) whose solution will benefit the world. Our ability to discover and support founders like Fervo’s is what gives us confidence, even in challenging and uncertain times, that we’ll be able to deliver on DCVC’s vision.