The Investment Shift from SaaS to Hard Tech

Katie Fox
Managing Director

By Katie Fox

For the past few decades “software and consumer enterprises have dominated venture capital investment areas accounting for 75% of all venture capital investments.” (1) Characterized by recuring revenue, high valuations and even higher margins, SAAS investments lured the majority of venture capital dollars in pursuit of the next unicorn. However, the COVID-19 pandemic, geo-political unrest, environmental and societal pressure have created strong headwinds for investors to shift focus from the traditional software investments to investments in hard technology and innovation. Hard tech, defined by visionary innovation and commercial pragmatism, seeks to use the best existing and emerging technologies to solve some of the world’s most fundamental issues. These issues include climate change, affordable housing shortage, the challenge of feeding a growing population, and environmentally harmful materials. 83% of hard tech ventures are designing and producing a physical product in the following verticals: energy, housing, synthetic biology, advanced materials, agriculture, biosciences, transportation, space travel and climate. Analysts suspect that if current trends continue and the hard tech ecosystem continues to evolve, investments in hard tech could “surpass $200 billion in investments by 2025.” (2)

Covid-19 and other geo-political events of recent years have drastically changed the landscape on what investors are willing to invest in and the legacy they want to leave behind. Investors have seen first-hand the need for automation given workforce disruption, alternative energy given world-wide energy disruption, precision agriculture technology given global food insecurity and the need for affordable, net-zero housing solutions across the globe. Many of these sectors have not seen substantial disruption for quite some time and represent a large portion of the total GDP of the United States. Construction for example, “represents 6.3% of the U.S GDP reaching an all-time high of $1.57 trillion last year.” (3) Innovation in this space includes advancement to both building techniques such as 3D printing and modular construction and the development of environmentally friendly materials. Collectively, new construction technology and improved environmentally friendly materials reduce build time, build cost and carbon emissions. Additionally, companies are turning to innovations in this space to help them achieve certain ESG initiatives. Private investors in this space are being joined by public institutions who have realized the true urgent nature of innovation in construction. For example, the recently passed U.S. Infrastructure and Jobs Act includes $100 million to be invested in digital construction technologies.

Investment in hard tech is not without its challenges. Notable challenges include the perception that hard tech takes longer, is more capital-intensive, and higher risk. Investors can be weary before committing capital that will be illiquid for quite some time with the possibility it may not be successful. However, hard tech already has an impressive track record. Unlike the attention focused on finding the next SAAS unicorn, hundreds of millions of dollars has been invested into hard tech in recent years. According to Fifty-Years Venture Capital firm hard tech companies “have increased the equity value of their portfolios by $3 billion or more, with at least 8 companies enjoying valuations of over $100 million” (3). Although initial equity needs are typically higher for hard tech, on average the costs remain relatively controlled in the long run as compared to SaaS ventures. Additionally, once a hard tech venture reaches profitability, founders can switch to non-dilutive funding and debt-financing.

As with any venture investment, hard tech comes with a high-risk, however, certain unique aspects of hard tech help to mitigate risks such as highly defensible IP and design to cost practices. Furthermore, investment risks in hard tech may be mitigated by opportunity to change the world for the better.