Deep tech venture capital firms make investments in start-up businesses based on scientific developments, advanced engineering, or the latest technologies. Start-ups might operate in sectors like artificial intelligence, robotics, biotechnology, quantum computing, semiconductors, space technology, climate technology, and advanced materials.
Deep tech startups need years of research, testing, specialized talent, among other competencies, to be turned into a profitable business, unlike standard software startups. In this case, deep tech venture capital firms will have a different estimation. They will care more about the proof of the correctness of technology rather than revenues or number of users.
What Makes Deep Tech Investing Different?
Like many traditional venture capitalists, deep tech investors are not simply putting money in companies that have proven ability. Rather, they need to wait until they see the formation of a mature company.
It usually takes a deep tech company several years to develop and launch its first product and commence its operations. Additionally, a deep tech company will require costly laboratories, production facilities, clinical trials, pilot projects, or licenses. Consequently, deep tech funds need longer investment periods and extensive expertise in science, engineering, manufacturing, and industry-specific risks. When financing a project, deep tech funds assume that the length of fund operation should be around 10-15 years, and that their investment teams should consist of specialists with various expertise in different fields.
The key thing about a deep tech investment is not solely related to whether consumers like the product or not, but to whether it is able to turn research results into an efficient product.
1. Assessing the Core Technology
Technical due diligence is the first part of the evaluation. Investors are interested in the scientific principles behind the product and investigate whether the technological breakthrough can indeed be considered credible on technical grounds.
Some of the questions are:
Are the scientific principles backed with scientifically credible references?
Does the corporation have sufficient experimental evidence to back its claims?
Is the technology genuine or simply an upgrade of a previous version?
Is the efficiency reproducible under controlled circumstances?
Are there barriers preventing competitors from easily replicating the product?
Investors may analyze patents, scientific literature, lab tests, technical papers, etc. They can also engage independent scientists to validate the company’s claims.
2. Evaluating Technical Readiness and Milestones
Deep tech venture capitalists commonly categorize progress in technology into measurable achievements, such as:
-Attaining proof of concept in science.
-Creating a prototype that works.
-Enhancing efficiency and effectiveness.
-Completing pilot tests using colleagues in business.
-Lowering production costs.
-Receiving permission from regulators.
-Creating repeatable procedures for production.
Although investors do not require every start-up at its early stage to have a product, they want to see that the entrepreneurs know the details of what is still to be done, how much the achievements of each milestone will cost, and how long they are likely to take.
A milestone plan that looks plausible informs investors on how much money one will need for each step of the way. The business of biotechnology will require funds for studies before clinical ones,s while the semiconductor company will need money for production and further tests.
3. Studying the Market Opportunity
The mere possession of scientific novelty does not ensure that a company will succeed. Deep tech investors analyze the application of the technology in order to establish what problem it solves, as well as the identity of the customer that would be willing to pay for the resulting solution.
They inquire about several issues:
How large is the target market?
What is the urgency of the problem?
Who will make the buying decision?
Does the solution represent a significant improvement compared to current alternatives?
Can the customer afford to adopt it?
Is the market affected by governmental regulations, government policies, or infrastructural barriers?
Usually the biggest competitor is the status quo. A startup may not compete with another startup; rather, they may have to compete against established companies, internal R&D teams, or traditional processes already familiar to customers.
Thus, investors must find proof of demand, such as pilot agreements, letters of intent, customer interviews, paid tests, or partnerships with established players.
4. Testing Defensibility and Intellectual Property
Deep tech businesses typically take years of research to form, creating significant barriers to entry. Investors in venture capital look at whether a company is able to cover its competitive advantage by patenting, proprietary databases, manufacturing secrets, or research infrastructure.
Patent portfolios might be useful but do not guarantee competitive advantages. Venture capitalists also have to consider the enforceability of patents and whether a competitor has a chance to use design-around patents in their favor.
There are also other forms of defensibility such as know-how and licenses, agreements with suppliers, and historical information gathered during testing of the product.
5. Assessing the Founding Team
The founding team plays a crucial role in deep tech businesses since they must deal with some unforeseen technological or business challenges.
Investors are interested in:
- Founders having advanced knowledge in science or engineering.
- Past record of quality assessment.
- Potential to find practical solutions to real-world problems.
- Skill in the business area and taking initiative.
- Ability to cope with a long development process.
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