The Tesla Gigafactory planned to be built in Mexico should be seen, Bloomberg argues, “as a graduation moment for Mexican manufacturing.” And there’s hope that the CHIPS bill, which President Joe Biden promoted to supercharge semiconductor production in the U.S., will benefit its southern neighbor as well.
While the prospect of new factories and more jobs is good news for Mexico, the country and its Latin American and Caribbean (LAC) peers can harbor higher hopes when it comes to deep tech, a new report posits.
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Titled “Deep Tech: The New Wave” and created in collaboration with the Inter-American Development Bank’s innovation laboratory (IDB Lab), the report concludes that there is room for a twentyfold increase in VC investment into LAC deep tech startups over the next decade.
While such projections are always open for debate, the reasoning and data behind this conclusion are worth looking into.
Diving deep
What “deep tech” means changes according to who’s using it. The consulting firm behind this report, Surfing Tsunamis, used this definition by Propel(x) CEO Swati Chaturvedi:
Deep technology companies are built on tangible scientific discoveries or engineering innovations. They are trying to solve big issues that really affect the world around them. For example, a new medical device or technique fighting cancer, data analytics to help farmers grow more food, or a clean energy solution trying to lessen the human impact on climate change.
Based on this definition, the report says LAC’s “most notable deep tech success story to date” is cybersecurity startup Auth0, which Okta acquired for $6.5 billion in 2021.
Despite this fairly broad definition covering everything from cybersecurity to biotech, most LAC startups don’t fit the bill. Inferring from a previous report, Surfing Tsunamis estimates that deep tech companies represent roughly 10% of the regional startup ecosystem.
“The vast majority of startups from Latin American and Caribbean (LAC) [regions] focus on product and business model innovation, with limited technology risk,” it said.
Venture capital investment into LAC deep tech represents an even smaller share of overall VC dealmaking in the region. However, it is on the rise, both in absolute numbers and proportionally, growing from $96 million (0.59%) in 2020 to $172 million (2.2%) in 2022.
What do the recipients of this venture capital look like? They are fairly diverse, both in terms of sector and country of origin.
Although most deep tech startups in the LAC region are biotech (61%), the sector’s significance varies by country. “Biotech startups are the main value creators in the deep tech sector in Argentina (80%) and Brazil (68%). Additionally, biotech holds significant value in Chile (24%) and the rest of the region (28%),” the report said.
However, the report noted that other sectors contribute significantly to specific markets even where biotech is the main deep tech value driver. “For instance, space startups, including Satellogic, contribute 15% to the value of Argentina’s deep tech ecosystem.”
Across the region, AI accounts for 11% of startups engaged in deep tech innovation. This goes beyond applying AI to straightforward cases, though. “We specifically refer to startups that use AI to address complex challenges, such as developing plant-based alternatives to animal products that are both appealing and nutritious,” the report said. NotCo, the Chilean food technology company making plant-based milk and meat replacements, gets a nod here.
Besides biotech, AI and space tech, we also have startups focusing on nanotechnology, clean tech, advanced mobility, robotics, advanced manufacturing, health tech, advanced materials and medical devices.
Importantly, 14 of the 33 countries in the region are home to at least one investor-backed deep tech startup. To flesh out that point, here’s an example: Partanna is a Bahamas-based startup that could make a dent in climate change with concrete that removes CO2 from the atmosphere.
Former NBA star Rick Fox’s startup gets $12M pre-seed for concrete that removes CO2
With $12 million in pre-seed funding, Partanna is one of the 340 LAC deep tech startups that have collectively raised $2.2 billion in venture capital to date. Of these, the report says, 98 have a valuation of over $10 million, 24 are worth over $50 million, 12 boast of $100 million price tags, and three are happily looming over the rest with around $500 million valuations.
Many of these startups are backed by accelerators and funds that are specifically focused on LAC deep tech. The region now has 15 investment firms that have deep tech startups accounting for about half of their portfolios.
“Argentina, home to seven dedicated funds, is initially leading the way,” the report says. It will be interesting to see if other countries catch up, especially because governments have a big role to play here. But this will only be one of several variables that help deep tech continue growing; an influx of foreign capital, for instance, would matter just as much.
What’s next
Whether foreign investors are ready to take seemingly riskier bets in a distant region remains uncertain, even more so in the current economic climate. When it comes to investing in Latin American startups, there was a clear deceleration in the first half of 2022, and it is unclear when activity might recover.
Declining VC investment into LatAm startups could throttle digital growth
Likewise, while on the rise, deep tech in the LAC still only makes up a fraction of deep tech globally. In Europe, where deep tech is high on the agenda, several funds have raised multiple times more capital than the $8 billion the report estimates for the entire LAC deep tech ecosystem.
Regardless, these are still early days, and the potential for growth appears to be immense. Here are the main factors that could catalyze the growth of deep tech in the region:
- Attractive early-stage valuations.
- Availability of large talent pools.
- Lower talent costs than in developed markets.
- Growing investor ecosystem.
- Opportunity validated by initial success cases.
- Emerging LAC deep tech business model.
- Lower risk due to faster and cheaper innovation cycles.
- Opportunity to leverage LAC’s biodiversity.
- Flat world: New tools enable born-global startups.
- Massive opportunities for disruption and value creation.
The growth of deep tech could also be more distributed, both across geographies and sectors.
“In upcoming years, we anticipate that Mexico and Colombia will gain larger influence and new countries will build ecosystems of their own,” the report predicts. Meanwhile, more verticals will gain prominence but won’t replace biotech, which is “poised to remain a prominent field due to its connections with food and agriculture, the availability of biodiversity, and the abundance of talented professionals.”
Again, projections are inherently more debatable than data. But there is one idea in the report that we agree with: LAC “needs innovation to drive productivity and growth.” In the region and elsewhere, policymakers face mounting difficulty in achieving a balance between economic growth, social development, and environmental protection. Could deep tech be part of the answer?
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