According to a recent report from the Boston Consulting Group, deep tech startups targeting key global challenges such as climate change, longevity, semiconductors, and AI now account for 20% of venture capital investments. But what exactly is deep tech?
The definition I often use of deep tech is a company that dedicates significant research and development resources to solving a very difficult scientific or engineering problem. Typically, these companies spend 3-5 years developing the technology to create a significant opportunity. That means deep tech startups are not lean – they’re not built in a garage in 3 months, and they require tens of millions of dollars of investment before they can sell their first product. But once they do, they usually generate huge revenues quickly.
One area of deep tech that I have personally been involved in for over a decade is encryption and privacy-preserving technology. Privacy is often thought of as a nice-to-have, but in reality it is essential to cybersecurity in nearly every application, from AI to blockchain to defense. Without encryption, secure messaging apps, online banking, and other services that we consider commoditized would not be possible. So, what are the big trends in encryption in 2024? As an entrepreneur who has started two privacy-first companies and an investor who has invested in over 60 deep tech companies, here is my analysis.
Recognizing the long-term value of privacy technologies
First, there is growing awareness and demand for data privacy. Consumers are becoming increasingly aware of the value and vulnerability of their personal data, driving demand for products and services that prioritize user privacy. It has not escaped consumers’ attention that digital advertising alone is estimated to have a total global value of $300 billion, according to a McKinsey study. This shift in consumer behavior has been further accelerated by high-profile data breaches and targeted advertising on social media and other web platforms, heightening public awareness of the need for robust security measures.
Regulatory Pressures and Compliance
Regulatory pressures and compliance requirements are also a major driver of this trend. The introduction of stringent regulations such as GDPR in Europe still requires significant investments in privacy and security solutions to ensure compliance five years later. Additionally, the impact of European privacy laws is global, affecting companies around the world and encouraging them to invest in technologies that meet these strict standards.
Technological progress and challenges
Technological advances and the challenges they bring are spurring further investment in this field. The widespread use of AI and big data technologies has made protecting personal and confidential data more complex and important than ever. Furthermore, cybersecurity threats are becoming increasingly sophisticated, making it essential for businesses and governments to invest in advanced security solutions.
Investors recognize long-term potential
Investors recognize the long-term potential of this sector and are viewing privacy technology not just as an immediate need but as a strategic investment. It is clear that the sector holds great potential for innovative solutions that provide both privacy and functionality. This foresight is guiding investments towards sustainable, impactful results.
As a deep tech investor myself, I have witnessed a shift in investor decision-making, particularly in the privacy tech space, throughout the pivotal year of 2023. This shift is due to a few key factors.
Value potential: My experience has shown that investors are increasingly viewing privacy technology not just as a trend, but as a fundamental requirement for future technological advancements. This realization is shifting investors’ focus to more sustainable, long-term investments in this space. Risk: As big data continues to evolve and become more integrated into everyday life, the risks associated with privacy violations are becoming more prominent. I, like many of my colleagues, recognize that technologies that can protect against these risks are crucial. Product-market fit: There has been a noticeable shift in consumer sentiment towards privacy, increasing demand for products and services that protect personal data. This consumer trend has become a key factor guiding investment decisions.
Having been deeply involved in the European deep tech ecosystem, I have seen how Europe’s strong regulatory framework on data protection has placed the continent at the forefront of the privacy tech industry. This environment fosters innovation and attracts investment into the sector. The collaborative spirit within the European deep tech ecosystem fosters unique solutions to privacy challenges, making it an attractive market for investors.
Finally, market trends and opportunities in niches are influencing investment trends. The diversity of threats and regulatory requirements has created numerous niches in the privacy and security space. In a market where data integrity is a growing concern, startups offering unique and effective solutions are increasingly being seen as valuable assets. This competitive differentiation is crucial in an environment where companies are differentiated by their ability to offer robust privacy and security solutions.
Looking forward: Privacy remains a priority
As we move towards 2024, the field of privacy technology is rapidly evolving, driven by increasing digitalization and the associated need for robust data protection mechanisms. Among the many emerging technologies, several have the potential to revolutionize how we approach privacy and data security.
Homomorphic Encryption (FHE)
Fully homomorphic encryption is a breakthrough in the field of data privacy and security. This technology allows computations to be performed on encrypted data without the need to first decrypt it. The implications are vast, especially for industries such as healthcare and finance, where keeping sensitive information confidential is paramount. FHE companies (including my own Zama) are raising significant amounts of funding because FHE is faster and easier to use. These two issues have hindered widespread adoption of FHE so far. In 2024, we expect to see FHE become prevalent in blockchain (enabling confidential smart contracts), AI (enabling both confidential training and inference), and more generally in sensitive cloud applications where a data breach is unacceptable.
Differential Privacy
Another important technology to look at is differential privacy. This approach allows you to compute aggregated statistics without knowing anything about each individual data point. This is particularly useful for web and mobile analytics, as it allows you to obtain cohort patterns without having information about individual user behavior. It can also be useful for government censuses, road traffic analysis from anonymized GPS traces, pandemic tracking, and more.
Federated Learning
Federated learning is a machine learning approach that enables model training across many distributed devices that hold local data samples. This technique is particularly important for privacy because it removes the need to share raw data. Instead, insights are gained locally, and only learnings from the data are shared. The First International Symposium on Federated Learning, held in 2023, highlighted the importance of federated learning (FL) as a pivotal technology for the advancement of future intelligent applications. This includes areas such as autonomous driving, smart manufacturing, and healthcare, where the role of FL is recognized as increasingly important. This approach is likely to gain even more attention in 2024 as organizations seek to leverage AI without compromising user privacy.
Zero-knowledge proofs
ZKPs allow one party to prove to another party that a statement is true without revealing any information beyond the validity of the statement itself. This has profound implications for online identity verification and secure transactions. ZKPs are also widely used in blockchain applications. Several chains, including Mina, ZCash, and Celo, already use zero-knowledge encryption in production. As the widespread use of blockchain technology grows to power secure digital transactions of all kinds, ZKPs will be an essential tool for maintaining privacy and security.
Looking to the future, it’s clear that privacy will continue to be a central focus in the deep tech sector. The challenge will be balancing the incredible potential of AI and big data with the fundamental need to protect individual privacy. The investments made in 2023 are just the beginning of a sustained surge in interest in privacy technologies as they become an essential part of our digital future.
