‘You need to have great barriers to entry’: More VC firms expand into deep tech as AI reshapes startup investing

More venture capital (VC) firms are expanding into deep tech, prompting investors to seek startups with stronger technological barriers to entry.

This all comes as Singapore ramps up support for the sector, and as artificial intelligence commoditises software development.

Deep tech refers to advanced technologies that derive their competitive advantage from scientific or engineering breakthroughs; examples include quantum technology and frontier AI.

The shift into deep tech is more of a “natural reaction of the market” rather than just VCs following a trend, said Tong Hsien-Hui, executive director for investments at SGInnovate, Singapore’s deep-tech ecosystem builder.

As AI makes tech more commoditised with businesses being built on AI-generated code, VCs are looking for businesses that can really scale globally, he noted.

“You need to have great barriers to entry so that it’s not so easy for someone to replicate so quickly,” said Tong. “You need to make it such that the next version of Claude is not going to wipe it out.”

Venture funding for conventional startups has slowed in recent years, while government support has widened the pool of investors keen to back deep-tech companies.

A report by EY-Parthenon and Enterprise Singapore showed that venture funding in Singapore fell 34 per cent to US$4.6 billion in 2025; deal volume fell from 725 in 2024 to 472 in 2025.

Singapore is helping to accelerate this shift, with S$1 billion set aside in Budget 2026 to top up Startup SG Equity, expanding the programme to include growth-stage deep-tech startups. Startup SG Equity is a scheme that co-invests with partners or makes direct investments via fund managers, SG Growth Capital and SGInnovate.

These efforts have resulted in attracting more VC firms that have traditionally focused on general technology.

Generalist VC firm Monk’s Hill Capital invested in autonomous drone startup BeeX in June. Another VC firm, Tin Men Capital, invested into enterprise AI startup Pints AI’s S$7.2 million pre-Series A round in June.

The two startups, along with Atomionics, which uses quantum sensing to map out and build 3D models of what’s underground without drilling, have also been invested in by Seeds Capital, an arm of SG Growth Capital.

Monk’s Hill has traditionally been a generalist tech investor, but co-founder and managing partner Lim Kuo-Yi said that it has been looking into applications that require more specialised tech. The investment in BeeX is part of finding opportunities in the dual-use space, where there are both commercial and defence applications.

Lim said that Monk’s Hill has known BeeX’s founders and has been tracking the startup for a few years, with the investment made based on traction and tech.

As for Tin Men, co-founder Murli Ravi said that its focus has extended further into frontier tech.

Pints AI is not the first deep-tech startup that Tin Men has invested in; it has also invested in Tau, which builds world models that account for underlying factors such as currents, weather and risks for ocean freight.

Ravi noted that the shift of capital into deep tech is reflective of a global trend, as investors seek returns commensurate with the risks taken.

With SpaceX and Anthropic showing that it is possible to get returns from spending huge amounts of money, investors’ appetite has moved past these “hard problems”, shifting capital towards deep tech.

“I think that the general attitude is contagious,” he added. “That’s why we’re seeing it in Singapore as well as South-east Asia more broadly.”

Going deeper

As VCs turn to deep tech, there are still hurdles for the ecosystem to overcome.

Lim of Monk’s Hill noted that while the number of deep-tech startups in Singapore – as well as the funding to such startups – has risen, the number has not grown significantly.

An SGInnovate report puts the number of new deep-tech startups incorporated in 2025 at 25, a slight decrease from 27 in 2023.

There are also risks that VCs will have to consider, such as access to talent and an ecosystem that can facilitate a startup’s growth.

Then there are the long gestation periods which are capex heavy, compared with the relatively cheaper costs of a traditional startup.

“That’s a lot of hurdles compared to the more digital-centric investment we are used to making, so it takes more underwriting and conviction,” said Lim.

With longer cycles, VCs will need to provide longer-term support than before when it comes to investing in startups that disrupt conventional business models with digital technologies.

Founders, too, will exercise more discernment in choosing investors, said Tin Men’s Murli, and would likely avoid VCs that lack understanding of the science behind the deep tech.

“There are opportunities for folks who have been consistent,” he added.

Still, with more money flowing into SG Growth Capital, there have been efforts to bring about more investments into deep tech via co-investments with VC firms or seeding funds.

Coupled with geopolitical tailwinds, there is more investor appetite and interest in deals involving robotics and AI.

“There’s a general interest across companies that are a lot deeper in terms of IP as opposed to just another consumer play,” said Lim.

While the circle of VCs investing into deep tech is widening, SGInnovate’s Tong noted that there is still room for funds to be deployed into deep tech in Singapore.

Expertise has to be built up to invest into deep tech, with VCs needing to differentiate between an AI company and an AI wrapper that just packages an existing model in a nice user interface.

“While a lot of (VCs) are assessing the model and the strategies they have for investment, the actual funds being deployed in deep tech can still grow,” said Tong.

In his view, VCs will have to invest earlier than they normally would, which is counter to how deep-tech investors work, coming into a deep-tech startup as late as possible to take on the least amount of risk.

“If companies want to get in on the big tech game, they actually need to place bets earlier in the cycle because they may find themselves priced out of later rounds unless they are very big,” Tong added.

Source: The Business Times © SPH Media Limited. Permission required for reproduction.

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