As a deep tech investor, I have often noticed that deep tech startups go through a different evolution cycle than a typical B2B or B2C company.
Accordingly, the challenges they face along the way are different — commercialization tends to be more complex and founders are often required to approach it differently.
Deep tech companies are usually built around a novel technology that offers significant advances over existing solutions in the market; often they create new markets that don’t yet exist. Taking these technologies from “lab to market” requires substantial capital carrying a much higher degree of risk than an average venture investment.
The majority of VCs are often surprised by the amount of complexity involved in building a successful deep tech company.
Typically, the underlying intellectual property (IP) of a deep tech company is unique and hard to recreate, resulting in a significant competitive advantage.
High risk, high reward
Since most deep tech companies are built around a fundamentally new and unproven technology, they carry higher risk. Typically, the tech has been tested in a lab or a research center and the early results are therefore often derived in a controlled environment. As a result, while building a product, founders are likely to encounter technical challenges along the way and won’t be able to eliminate the technology risk until later in the process.
By comparison, if a company is building a marketplace for used cars, for example, the technology risk is almost zero. Deep tech companies have the capability to create new markets with little competition and can replace existing technologies while fundamentally transforming an industry.
Microsoft, Nvidia, ARM, Intel and Google were all deep tech startups in the beginning. These companies will almost always require higher capital, carry higher risk and have longer time to return on investment.
However, if successful, they could deliver outsized returns over an average venture investment.
An obvious, but fundamental difference with deep tech companies is their technology-first approach. Typically, the founder has developed a novel technology or IP as part of their Ph.D. thesis or postdoc work and is in search for a real-world problem it can solve. Most startups, in general, pick an existing problem in a market they know well and develop a product that solves for that problem and they have a clear sense of the problem they need to solve.
Deep tech entrepreneurs take the opposite approach and as a result they often suffer from SISP (a solution in search of a problem), as Y Combinator calls it. Founders need to be aware of this and must be willing to pivot and repivot based on market and customer feedback. Investors should be prepared for this before backing the company and support the founders as they navigate through the challenges of building a successful deep tech company.