Startups working on the most important problems got only about one-fifth of venture funding in 2018.

As lobbying gets under way for another stimulus package to help the United States recover from the coronavirus pandemic, a handful of policy advocates and investors are pushing for a longer-term strategy: Invest in research and development, or Deep Tech, to help the United States recover economically and regain its innovation edge.

Some proposals, including a bipartisan measure in the Senate, call for an increase in U.S. government funding for research. Other ideas include expanding Small Business Innovation Research grants to help later-stage companies, creating research hubs in the middle of the United States. Another group of advocates is pushing, meanwhile, to seed a venture capital industry in states outside New York and California.

In March, Different Funds, with support from Schmidt Futures, a venture facility for public benefit founded by former Google CEO Eric Schmidt and his wife, Wendy, produced a landmark report on the state of investing in Deep Tech. It defined Deep Tech as ventures that aim to solve big problems with scientific innovations. The pandemic meant the report was mostly missed in the media.

But the report found both a capital gap for the most innovative companies and a potential market. Investors, mainly high net worth individuals and family offices, seek opportunities for returns in companies that also make a difference in the world, but they don’t have the networks,  information or possibly, the financial structures to help them make those investments. Citing MIT/Pitchbook data, the report said that out of $131 billion invested in startups in the United States in 2018, only about $11.8 billion went to Deep Tech companies outside Life Sciences, which got $19.3 billion.

The report found the gap, which it did not quantify, between the end of government funding for ideas, which often flows through the country’s 250 research universities or 40 national laboratories, and late stage, when commercial viability is obvious.

The report identified 14 areas as Deep Tech, including Artificial Intelligence and Clean Energy, noting that blockchain is defined by others as Deep Tech.

Source: Different Funds

The makeup of the current finance system for venture investing compounds the capital gap. Traditional venture firms seek to keeping investing only in the ideas with the biggest potential, looking for home runs. Companies that might reach an exit of $200 million, big by many standards, may not find investors at all, the report found.

It also noted that venture firms with fewer Ivy League educated partners tend to be more invested in Deep Tech.

The report identified 11 venture firms as having an outsize presence in the Deep Tech space, though it also noted that more than 200 venture firms have some Deep Tech investments:

Source: Different Funds

Big companies are the other potential source of funding for Deep Tech ventures, through their venture arms or via partnerships with startups. But big companies are increasingly oriented to the short-term and apt to be on the chopping block if public shareholders demand fatter margins or bigger dividends.

The report also offers evidence of a potential market. Venture investors, who are mostly high net worth individuals and family offices, want to invest in companies that are making a major impact – a positive difference in the world. I heard the same thing in a recent interview with partners of Obsidian Opportunity Fund. “We have seen an increase in interest from wealthy families and individuals looking to make an impact with their investments,” said Alison Delgado, partner.

But the uncertainties around what “impact” means muddies the waters, the report found.

The confusion and opportunity linking impact investing and DeepTech arise from a parallel lack of uniformity in terminology. impact investing as a term was coined by the Rockefeller Foundation in 2007, and has been marred since inception by both a conflation with philanthropy and a belief that it implies giving up quantitative returns for qualitative environmental, social, and governance outcomes.

The pandemic and the Black Lives Matter movement have forced a realization on many people: The needs in the United States are greater than they allowed themselves to know, and the country is slipping further.

“USG investment is dropping, both as a percent of U.S. budgets, and relative to other countries. Federal investment in R&D as a percentage of GDP peaked at 1.86 percent in 1964 but declined to 0.66% in 2016. Industry now leads in R&D spending. But corporations face short-term market and shareholder pressures to focus on incremental advances in existing technologies. They are not funding research and development that leads to new breakthroughs in science and engineering and later spurs growth or broader advancements of a field,” according to the report.

Though there is a growing consensus around the idea that long-term investment in Deep Tech could produce returns for investors, innovations that would benefit society, and economic development for people and communities that have lagged, there’s not a clear path to creating change.

Increasing federal funding might help – but it wouldn’t solve the gap in the middle, where companies are testing and bringing their ideas to market. The fractured political system makes passing federal legislation extraordinarily difficult, even when there is bipartisan support.

Moves In Washington, D.C. Could Increase Funding

In March, four Senators, Amy Klobuchar (D-Minn), Chris Coons (D-Delaware), Tim Kaine (D-Va) and Angus King (I-Maine) introduced the New Business Preservation Act, which would allocate $2 billion in federal dollars to match venture capital investment, aiming for states outside the main venture capital hubs of Silicon Valley, New York and Boston. Based loosely on the public-private partnership that spurred Israel’s venture finance industry, the idea has been supported by the Center for American Entrepreneurship.

Sens. Chuck Schumer (D-NY) and Todd Young (R-Indiana) have introduced a bill called the Endless Frontier Act that would provide $100 billion strategic investment to a reformed and renamed National Science and Technology Foundation, and deliver $10 billion to establish regional tech hubs.

The stimulus packages are giving politicians an opportunity to pass longer-term initiatives even amid Washington’s dysfunction. Some other changes could happen at the agency level, Kolarich noted.

“There are a number of discussions going on both on the Hill and at the agency level,” he said by email. “We know of several agencies as well as branches of the DoD looking at ways they can evolve their SBIR programs to expand their reach and provide capital later in a company’s startup cycle.”

To be notified of the most important entrepreneurship news and opinion from around the globe, sign up for our weekly newsletter:

This story and others on New Builders Dispatch are made possible by a sponsorship from the Ewing Marion Kauffman Foundation. The Ewing Marion Kauffman Foundation is a private, nonpartisan foundation that provides access to opportunities that help people achieve financial stability, upward mobility, and economic prosperity – regardless of race, gender, or geography. The Kansas City, Mo.-based foundation uses its grantmaking, research, programs, and initiatives to support the start and growth of new businesses, a more prepared workforce, and stronger communities. For more information, visit and connect with and