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London Tech Week

Deep tech: two words leading non-venture investors to scratch their head. What makes it deep? 

Jeremy-brown

Deep tech means companies that are based on fundamental technological innovation, usually being built by scientific experts in the space. These companies don’t beat their competitors through advertising dollars or brand, they win through their ability to continue out-innovating everyone else. 

Deep tech investors are backing true frontier companies. They believe the next wave of companies redefining our way of life will not be consumer apps but will be using physics, qbits, or artificial intelligence to do things that once seemed inconceivable. 

At Creator Fund, we evaluate over 150 deep tech companies a month. With this volume, we’ve noticed a few patterns, pitfalls, and roadblocks that the unfamiliar may stumble upon.

Building a deep tech company, where most founders come with technical expertise, isn’t the same as SAAS or marketplaces. It is harder to map out immediate milestones, revenue is slower and less likely to be recurring.  For the aspiring deep tech entrepreneurs out there, we identify 7 key observations to look out for as you embark on this journey:

  1. Hire a commercial lead much earlier than you think you should.

Deep tech founders tend to value technical expertise much more than commercial acumen. They also wait to build a commercial team because the early focus is R&D. But bringing in commercial thinking from day one makes a huge difference.  A well-developed go-to-market can be game-changing and persuade an investor to invest early.

Often two PhDs will have mastery over their product and how to build it but driving the sales funnel and ultimately converting the right customers needs its own expertise. An effective sales strategy is important and that takes someone who has the ability to navigate complicated sales organisations or quickly figure out an effective sales hook. They also help shape the company’s brand and give it a compelling story.

Bring a sales lead in early. And remember that nothing is so brilliant that it sells itself. 

  1. Don’t fall into the infinite product iteration loop

Don’t fall into the perfection trap. Meaning, you iterate on your product to infinity without getting it into the hands of any potential customers. That’s a huge mistake. Be satisfied with the product not being perfect and get customer and user feedback sooner rather than later to drive development and priortise commercialisation when the readiness level makes sense. 

It’s better to have a beta version ready and to continually communicate the next generation of product to your prospective customer. The faster that you can begin engaging with potential buyers, the better you’ll be equipped to execute on your go-to-market strategy when the time is right.

  1. Don’t sign exclusivity

If you have a product that a large company wants, it may be appealing to sign a lucrative exclusivity agreement early on with them. Don’t do it! This will not only make it difficult to raise any capital from VCs but your future product (or feature set) trajectory and growth will be fully dependent on one customer, greatly inhibiting future growth – even if the exclusivity is partial. It will also signal to future investors that you might make a low valuation sale to that customer, and don’t have the ambition to go the whole way. 

  1. Be careful when allowing an angel investor to set the price of your round in many cases

We have seen many instances where angel investors will set the price on a round. We love working with angel investors and they are a huge value add at the early stage. But, many are not institutional investors and may, seriously under or over value your company in its early days. In a recent case we saw angels take 42% of the company, making it almost impossible for those founders in the future. 

  1. Be sensitive about your cap table with respect to university ownership

For university spinouts in particular, some universities take a very high equity position (>20%) of your company. Some investors are okay with this, but many are not. Work closely with the university’s tech transfer office and negotiate, to the extent possible, that sets your company and its cap table up for future success, especially if you intend to raise from traditional institutional VC investors. There are several ways to approach this that any seasoned deep tech investor can walk you through. 

Most good Series A funds expect founders to be at 50% ahead of the round. If the university has taken 30/40/50% on day one, that becomes impossible. 

  1. Full-time team members are important in the C-Suite

Often times, with university spinouts, several co-founding members will remain on part-time. Think very carefully about whether this a good idea. Most importantly, the person leading the company (CEO) and driving the product development (CTO) should be full-time or have a clear path to becoming full-time in the future. VCs want to see commitment, you need to be more invested in your business than they are. 

One compromise is to have a full-time faculty member on board as a Chief Scientific or Strategy Officer or, in some cases, as a Chairman. The equity holding of each co-founder should be representative of how much work they are putting into the company on a day-to-day basis.

For those that are part-time, equity ownership should be reflected in time commitment to the company and value add. Full stop.

  1. Have clear milestones for the next round

The danger of deep tech is that you disappear into a laboratory and come up for air in 3 years time after extensive R&D. This is a problem for customers because you have not got feedback on what you’re building. And it is a problem for VCs, because it is not clear what milestones you’ve hit that allow you to say “our company is now more valuable because of XYZ.”

Be careful to plan in advance what you will achieve from both (a) technology standpoint (b) commercial standpoint that’s going to allow you to keep raising future rounds. 

Jeremy Brown is a Partner at Creator Fund. He holds a PhD in geophysics from Stanford University and MBA from Stanford Graduate School of Business. Jeremy has invested in early stage deep tech companies globally and has been based in Silicon Valley, Berlin, and London.

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