Wait, is this even physically possible?”
Fundraising is hard for every startup, but only deep tech startups face questions like this from VCs. Innovation often does not come without issues, and there are problems regardless of how good your concept is, or how superior your technology is.
Your pitch may well be the first time a VC has even heard of a concept, so how can they possibly work out how to invest in your idea when it sounds like sci-fi?
No one wants to invest in the next Theranos
A VC’s job is to find the next biggest company. To do this, they need to understand what the company does and how it makes money. VCs hear big claims every day and don’t want to be taken for fools.
As a result, they usually treat new ideas with skepticism and tend to avoid investing when they don’t understand something. This disadvantages deep tech and those working on something that’s truly cutting-edge.
As with any other fundraising challenge, the key is to put yourself in the investor’s shoes and build your pitch around that.
Before you start fundraising, it’s worth asking yourself: How likely is it that a VC will truly understand my tech or even have heard of it before? How much does the public know about this area? Is it being reported in the general media, or is it still only being discussed in specialist journals?
Would a VC need to be very familiar with the latest research in your area or have attended a specialist conference? Think about how your claims will sound if your pitch is the first time someone has heard of this idea.
The thing is, even if an investor doesn’t think your claims are fraudulent — as was the case for years with Theranos — you probably won’t seem credible if you’re the first person making this claim. How can you deal with this skepticism and help VCs go from thinking, “This is sci-fi,” to “This is the next big thing”?
You won’t get a quick yes
Most startups are typically advised to try and get to a quick no so they can avoid wasting time with VCs who will never say yes. But if your idea is truly revolutionary, investors will likely need to be repeatedly exposed to it so they can understand it, believe it’s possible, and see if other startups are popping up to validate the concept.
It’s surprising how often an idea that sounded incredible a year ago will now just feel like it’s “advanced.” Deep tech founders need to plan for this and expect fundraising to take longer than it does for other startups. You need to spend more time cultivating relationships — it may take a year of constantly reintroducing yourself, the idea, and the market.
What does staying in touch look like? To start, it’s vital to keep investors up to date on what is happening in the industry so they can see how the area is changing. Seeing is believing, and you need to be the one showing them the evidence.
“Friends of the Startup” emails are a great way to remind investors and customers that you exist and to show your progress. Forwarding news articles on industry developments validates the market. In-person lab tours are a great way to reassure people, but papers and talks can be just as effective. If you’re at the cutting edge, it’s likely that investors will start to meet more and more startups in your field.
To investors, it will seem like the market and the tech are picking up. The key is to be in touch frequently enough that they know you’re the best in a growing market.
When your startup operates across sectors
Many deep tech startups straddle two sectors — for example, space and life sciences, or hardware and AI. The problem is that specialist investors may understand one sector but not the other.
They will be able to test if your tech is feasible in “their” area, but won’t know enough about how it will thrive in the other area. What if the business fails to take off in the other sector? Alternatively, generalist VCs may not know enough about either sector to invest.
That’s why it is important to introduce investors from different sectors to each other. They can guide each other and reassure one another that the business works in their respective sectors. These investors will rely on each other’s expertise. Bring in investors from both sectors in early rounds so they can guide more generalist investors at a later stage.
Avoid the fast no
In my opinion, deep tech startups need to avoid a different kind of “fast no.” Make sure you don’t get rejected outright because an investor did not know what to ask. Use an FAQ at the end of your deck to answer questions people who are unfamiliar with your field might not know to ask.
The role of corporate venture capital
How can you enhance your credibility if investors are worrying about the credibility of your claims? Consider bringing corporate venture capital (CVC) on board as investors. CVCs can act as the ultimate stamp of approval. In theory, CVCs are incredibly diligent, and have access to discerning scientists and engineers who can sense-check your claims. Other investors know this and can rely on CVCs as a demonstration that your claims stack up.
However, investment from CVCs also has its drawbacks. For example, the presence of CVC investors can put off other potential acquirers who don’t want to enter a bidding war. It is worth considering bringing on a few CVCs to avoid tying your startup to one company. Avoid right of first refusal, and if you can, do not give CVCs a board seat.
Sure, you’re a genius but can you make money?
Even after spend weeks convincing people that you’re a genius who can break physics, they may just turn around and worry that you’re “too tech.” Now that you’ve convinced people this is real, can you make money?
This is a major problem for deep tech startups. Investors may be convinced that your tech will change the world, but what they will wonder if will you be the one to make money from it or will you just enable your customers to make lots of money using your tech? Founders must spend a lot of time proving to investors that they are capturing the value and maximizing it.
VCs could also worry that you’re a tech genius who can’t sell or understand how to market successfully. You need to prove you’re commercially savvy: Does your go-to-market strategy make sense? Is your pricing right? Can you close a deal? Of course, that brings us right around to the question all startups are asked: How are you going to make this a venture-scale business?
As with any other fundraising challenge, the key is to put yourself in the investor’s shoes and build your pitch around that. Imagine you had just heard about a new and game-changing concept for the first time. Now imagine you hear those sorts of claims every day! What evidence would you need to see to believe that it’s for real this time? Who would you speak to? What would you double-check? How long would it take?
Your task is to take your investors on that journey and help them draw the right conclusion — that your startup is “the one.”