Building Out Loud #2 - What's different about deep tech investing?
Deep tech due diligence, convincing SaaS investors and skills needed to become a deep tech investor.
In this digest:
What are the critical differences in how an investor approaches the diligence process for deep tech vs a software investment?
How do I get SaaS investors to look at deep tech?
How ‘technical’ does one need to be, to be a deep tech investor? What are the foundational elements of knowledge that one should have in possession?
Updates from the Building Out Loud Crew on ESG and whether or not to sign a non-disclosure agreement.
What are the critical differences in how an investor approaches the diligence process for deep tech vs a software investment?
Thanks to Adam Miller for this question. Ask yours here.
I once met a SaaS investor who invested entirely from the data revealed in online analytics platforms. “Send us your analytics data, and we’ll decide quickly whether to invest.”
We can build software businesses very quickly now. There is the infrastructure to get there quickly, combined with a sophisticated entrepreneurial community that knows what to do. Investors have an expectation of visible business traction before they invest.
Deep tech is different.
Natively harder to build, difficult to understand, longer to build/prove and generally more costly. Here are some of the questions I ask myself when looking at a new opportunity.
What do I need to believe?
A deep tech investment is likely to be riskier than a software investment, so it is only worth looking at closely if the opportunity is big enough.
Is the problem being solved big and important?
If the business can solve it, does the technology provide a ‘moat’ around the solution that makes it difficult for others to compete?
These threshold questions need to have good enough answers before going further. At this stage, the process is still similar to a software investment, but the risk and impact thresholds are cranked up.
The more specific deep tech due diligence starts here. Deep tech due diligence interrogates and constructs a company’s ability to make the idea real. I tend to invest very early, and so most of these questions are more “Can they get there?” than “Are they there?”
I am listening to the plan and how the team thinks about it. The best teams don’t tell us it will be easy (when is it ever?), but have thought through the challenges and have ideas for working through them.
Because there is more risk that the science doesn’t work: I need to believe that the science behind a business can deliver a solution and do so in a commercially reasonable way. e.g. Making nature-equivalent milk without cows is incredible as long as the technology can lower the cost to a price that consumers will pay for milk. We speak to our network of science advisors and often facilitate meetings between them and a company so that we can understand the feasibility of the science. Our questions are not just “Is this good?” and “Will this work?” but also “What is this going to need?” and “How do we make this better?”
Because it will require more time and money: I need to believe that there is a feasible plan for staging capital requirements against the impact delivered and the valuation uplifts that come from that. We’re building rockets, factories and quantum computers. The biggest risk in these companies is that they can’t demonstrate value faster than they need money. How do we shorten and strengthen the go-to-market plan?
Because there is unlikely to be a ‘ready-to-go’ market: I need to believe that the team has a plan for bringing this to life. This market annealing requires time, money and discipline that is often completely ignored with a belief that the technology will speak for itself. Deep tech companies need to work on building their market as well as building their product.
Because there is likely to be existing infrastructure and people: I need to believe that the company knows its relationship with them. Startups often begin with a ‘disruption’ strategy which I have never seen work. It ignores the ability to build on billions of dollars of prior investment, decades of time and pre-trained, experienced talent. It also creates enemies for no good reason which become considerable headwinds in the future. What is the plan for integrating? If there isn’t one, is there a plan and enough time for the battles to come?
Because the solution is likely to be complicated: I need to believe that the leadership of the business can explain something in 5 levels of difficulty. To be successful, the company must explain why it is valuable to people who will need different ways of explaining. One moment it will be a scientific peer that needs to believe the details of the science; the next it will be a meme in a Twitter post targeting school students.
Consider those risks as you build your pitch and role-play the investor perspective.
How do I get SaaS investors to look at deep tech?
Thanks to Vanouhi Nazarian for this question. Ask yours here.
Deep tech (or frontier tech, as it is sometimes called) will be a mainstream venture category in the near future. There is still plenty of SaaS investing to be done, but I think we've passed the peak of digitising real-world workflow, media, and commerce. Alpha lies elsewhere.
SaaS investors must look at deep tech
The next waves of tech that will build growth industries of the next few decades are biological; they are in space, they use quantum physics, sequester carbon in millions of hectares of land, and they make physical things in sustainable ways.
Deep tech, in other words.
So, SaaS investors will look at deep tech. They must look to get the growth benefits of this new wave. The question is, how do you get them to invest?
The job of financing and building a deep tech company is different to SaaS and wrought with cliches that give SaaS investors pause.
The 4 cliches of deep tech that can lead to a 'No' and some ideas for your response
#1 - Deep tech companies cost a lot more to build: This can be true, but the sales process is less contested than SaaS due to the uniqueness of most deep tech solutions. Focus on: How to articulate a financing plan and how that will play out over time. Do investors believe you enough to back you? Is it a big enough outcome to take the risk? Consider: What are the different sources of revenue? Is there more non-dilutive funding like government grants? How will you use consulting revenue to monetise your business development? How quickly can you get a modular version of your company to something that can use loans to fund infrastructure and hardware builds?
#2 - Deep tech companies take longer to build: Sometimes this is still true, but it is also true that several platform technologies are now reaching a maturity that allows for a deep tech speed we have not seen before. Focus on: Designing your process for 'visible velocity' by breaking down the work into units of proof and stepping along that plan as fast as possible. Consider: Can you get out of the lab sooner to work directly with customers? What can you sell sooner while you grow towards the main vision? Regularly show investors that you are moving along as planned.
#3 - Deep tech founders are not entrepreneurial: Some scientists are also gifted entrepreneurs, so this cliche is overly broad. But if your team is only scientists communicating as scientists, this is a risk to address. Focus on: Creating an interface for your company that demonstrates that you have the other parts of business building on the team. Consider: Can you tell a story people understand and get excited by? Is there an approach to business development that is well thought through? Does the org chart have the right people in the right seats for the stage of the company? Are you presenting in a way that non-tech people understand?
#4 - "This could be Theranos": When deep tech founders show up with a cure for cancer or an emissions-free way to make fertiliser, investors are worried they won't understand the science enough to back the company. Focus on: Providing access to people and resources that remove this uncertainty. Consider: Who could you add to a list of independent experts investors can call to validate? What information could the investor send them to review? Do you have published scientific papers that you can send in a pack to investors? Do you have 'Dummies Guide' versions that explain them without needing a PhD?
SaaS investing is a mature category. There is data that SaaS investors refer to, which they map to stages in your lifecycle to arrive at a reasonably clear assessment of risk.
You need to work harder to show them how to think about your deep tech company.
And, whatever you do, don't let them rest inside one of the cliches. They probably won't make it out of there!
How ‘technical’ does one need to be, to be a deep tech investor? What are the foundational elements of knowledge that one should have in possession?
Thanks to Adam Miller for this question. Ask yours here.
No two deep tech investors are the same. Some are very technical, trained in science and able to go deep into the foundations of an invention. Some are from entirely different backgrounds.
It is helpful to understand the science, but it is not core because we are investors, not scientists. Our primary job is to discover and grow companies.
We can't be experts in everything, and sometimes it is good to have something of the opposite. I may be a useful, confounding example of this. I began my career as a theatre director. I think like an artist and not like a scientist. I am absolutely the 'dumbest person in the room' when I am with the people we invest in. But the role I play is crucial.
The starting point for any of these companies is probably some great science. We need some process to come to a position of risk and opportunity around this. Then there will be a bunch of other stuff that is missing. Precisely NOT the science. The story, the market, the pricing model, the talent... everything else.
So, what do you need to possess?
A deep curiosity: when confronted with something new, the first instinct is a deep fascination with how it works. You want to understand enough to be able to have a conversation. Especially to answer 'So what?' questions and to understand the risk and opportunity.
Synthesis: everything we look at is new. There is very unlikely to be a playbook that is ready to slot in this new innovation. Ideally you will be bringing in a broad knowledge toolkit that you can weave through this opportunity to bring new connections and new cohesion.
Something other than tech: the founders of the company know the tech. They are probably the best in the world. What do you do? How are you useful by bringing a contribution they are desperate to understand?
Undoubtedly, having some technical training is an advantage as long as you can shake it off when you need to do all the other work of a venture builder.
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Building Out Loud #2 - What's different about deep tech investing?
Interesting stuff! One statement of the obvious is that "Deep Tech" is more a description of technology & market maturity than a stable category. You could argue that SaaS was "deep tech" in 1998 (pre-AWS). Outside of the context of Main Sequence (whose mandate is clear), to what extent does it make sense to talk about a "Deep Tech investor" rather than an investor in a vertical (e.g. AgTech, Food Production, Carbon Capture, etc).