Fundraising is difficult for all startups, but only deep tech companies face questions like this from venture capitalists. Innovation is often not without problems, and there are problems regardless of how good the concept is or how superior the technology is.
The pitch may be the first time a VC has heard of a concept, so how can they possibly figure out how to invest in the idea when it sounds like science fiction?
Nobody 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. Venture capitalists hear big claims every day and they don't want to be taken for fools.
As a result, they often treat new ideas with skepticism and tend to avoid investing when they don't understand something. This puts deep tech and those working on something that is truly cutting-edge at a disadvantage.
As with any other fundraising challenge, the key is to put yourself in the investor's shoes and develop the proposal around that.
Before you start fundraising, it's worth asking yourself: What are the chances that a VC actually understands my technology or has even heard of it before? How much does the public know about this area? Is it reported in the general media or is it only talked about in specialized magazines?
Would a venture capitalist need to be very familiar with the latest research in their area or have attended a specialist conference? You have to think about how the statements will sound if the proposal is the first time someone has heard about the idea.
The thing is, even if an investor doesn't believe your claims are fraudulent (as was the case for years with Theranos), it probably won't seem credible if you're the first person to make this claim. How can you deal with this skepticism and help venture capitalists move from thinking, “This is science fiction” to “This is the next big thing”?
You don't get a quick "Yes"
Most startups are usually advised to try to get to a quick no to avoid wasting time on venture capitalists 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 emerging that validate the concept.
It's surprising how often an idea that seemed incredible a year ago now seems "advanced." Deep tech founders should plan for this and expect fundraising to take longer than other startups. You need to spend more time cultivating relationships; It can take a year to constantly reintroduce yourself, the idea, and the market.
How do you maintain contact? For starters, it's vital to keep investors up to date on what's happening in the industry so they can see how the market is changing. Seeing is believing, and you must be the founder who shows the evidence.
“Friends of the Startup” emails are a great way to remind investors and customers that you exist and show progress. Sending news articles about industry developments validates the market. In-person lab tours are a great way to build peace of mind and confidence, but articles and talks can be just as effective. By being ahead of the curve, investors are likely to start learning about more and more startups in the same field.
It will appear to investors that the market and technology are recovering. The key is to stay in touch often enough so they know you are the best option in a growing market.
When the startup operates in all sectors
Many deep tech startups span two sectors: for example, space and life sciences, or hardware and artificial intelligence. The problem is that specialized investors may understand one sector but not the other.
They will be able to test whether their technology is viable in “their” area, but they won't know enough about how it will thrive in the other area. What happens if the business fails to take off in the other sector? Alternatively, generalist VCs may not know enough about either sector to invest.
That is why it is important to present investors from different sectors. They can guide each other and ensure each other that the business works in their respective sectors. These investors will rely on the experience of others. Attract investors from both sectors in the early rounds so that they can guide more general investors at a later stage.
Avoid the quick “No”
Deep tech startups must avoid a different kind of “no fast.” You have to make sure they don't reject outright because an investor didn't know what to ask. Using a “Frequently Asked Questions” space at the end of your presentation to answer questions that people unfamiliar with the field may not know how to ask is a good option.
The role of corporate venture capital
How can credibility be improved if investors care about the credibility of claims? It is worth considering the possibility of incorporating corporate venture capital (CVC) as investors. CVCs can act as the final seal of approval. In theory, CVCs are incredibly diligent and have access to discerning scientists and engineers who can test their claims. Other investors know this and can rely on CVCs as proof that their claims are cumulative.
However, investment from CVC also has its drawbacks. For example, the presence of CVC investors may deter other potential buyers who do not want to get into a bidding war. It's worth considering incorporating some CVCs to avoid tying your startup to a single company. Avoid preemption and, if possible, not give CVCs a place on the board of directors.
You are a genius, but can you make money?
Even after spending weeks convincing people that a genius capable of breaking physics is leading the startup, they may simply turn away and worry that you're "too techy." 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 technology will change the world, but what will they wonder if this initiative will make money from it or will it simply allow its customers to make a lot of money from its technology? Founders must spend a lot of time demonstrating to investors that they are capturing value and maximizing it.
Venture capitalists might also worry that you're a tech genius who can't sell or understand how to market successfully. It is imperative to demonstrate business insight: Does the marketing strategy make sense? The price is correct? Can a deal be closed? Of course, that leads directly to the question all startups ask: How are they going to make this a venture-scale business?
As with any fundraising challenge, the key is to put yourself in the shoes of the investor and develop your proposal around that. Imagine that you have just heard about a new and revolutionary concept for the first time. Now to think that you hear those types of statements every day! What evidence is necessary to believe that this time it is real? Who would you talk to? What would you check twice? How long would it take?
The task is to accompany investors on this journey and help them draw the right conclusion: that the startup is “the one.”
