Deep tech start-up funding: Learnings from running the investor gauntlet
In February of last year, I attended the Materials Research Exchange 2020 conference in London. I was blown away by the innovations in advanced materials that people were producing and their potential to revolutionise our lives. Yet, as I spoke to more and more innovators, I heard the same refrain: that a lack of funding was holding them back from taking their trailblazing products mainstream.
It’s what is commonly known as the Valley of Death in materials science: you have a working and fully tested prototype (your MVP) into which years of planning, research, production, and work was dedicated, and you’re ready to scale up, but you can’t do that without funds.
Advanced materials fall into the broader category of “hard” or “deep” tech. At its most basic, a technology that is not an app and which is typically defined by its potential for having a huge impact, but also having a larger risk profile due to longer timelines to industrialisation and higher funding requirements to get there. It covers areas like biotech (which has seen a boost in funding due to Covid-19) and quantum computing, among others.
When it comes to deep tech, for someone in the realm of finance, unfamiliar with the space who cannot determine whether your product is better than other innovations in the field, it might seem a hugely risky proposition. It accordingly takes a special kind of investor who is sufficiently interested and appropriately equipped to understand the significance of your innovation, and who is willing to take on the higher risk profile and accept the longer timeframe to returns.
This challenge is particularly apparent in places outside of the US, which leads in terms of volume of investment in these fields (and where it is also arguable universities apply a better model for encouraging, and providing resources for, the innovators they foster to commercialise their creations than in other parts of the world).
So, faced with this higher hurdle, where is a founder to begin?
If you were to read a typical article running through a list of things startups need to consider when pitching to investors – whether it’s about how a VC will make their decision to invest, or how to structure a pitch deck – you might see that it tends to be the same set of rinse and repeat points. Recurring revenue, traction, team, and so on. It’s the same with posts on social media about “the top 3 things investors look at when deciding whether to fund your startup”.
Yet only a handful of those make sense if your value proposition is not an app, but instead an early stage hard tech or deep science innovation. This makes sense in that if you look at what most of the prominent VC funds target (at least here in the UK), their portfolio focuses on “tech” in the sense of software as a service (SaaS) companies. This broad category has dominated the market and likely been amplified by COVID-19 and the need to quickly and effectively facilitate remote working and communications. A way forward is less clear if you’re in a space that is producing a physical product, particularly if that product is at the cutting edge of science, which brings with it a much larger learning curve for the investor.
Everyone is pressed for time, so your slides need to ensure you succeed in getting their attention, but also need to go the extra mile to explain your tech. I have in the past had feedback that our deck “does not go in enough depth to allow people to understand the tech,” and that the slides “have too many words on them and are therefore not sufficiently engaging,” both from the same investor and referring to the same deck. It may sound funny but it is a difficult balance to strike.
There are plenty of resources online already running through the typical slides you need, and arguing for different approaches, and these are worth reviewing to make sure you have the essentials checked off (a quick Google search has you covered, but if you’re lost then check out this one from Blackbird VC which emphasises on telling your story your own way and goes into fundraising process more broadly).
But below I’ve distilled some pointers specifically aimed at pre-revenue hard tech startups. These include personal learnings from discussions over the years with investors from different professional backgrounds and with different focuses. These are not intended to be exhaustive, and it is of course important to remember that each experience in this area will be idiosyncratic more so than it will be for a software startup, and ultimately it’s up to you to determine what is the best way to tell your story.
You need to be great at explaining your technology in a way a layperson can understand
At one of the panel discussions I attended at the conference in February, a panellist was lamenting how difficult it was to explain his innovation to people in the realm of investing. Yet in my view it is on you, the innovator or founder or CEO, to be able to sufficiently distil your product and effectively describe what makes it special. Investors will not (most likely) have specialisations in your field, but they are intelligent people who are actively looking to invest in great ideas and teams, and so you need to get them excited by your story to pass the first hurdle.
- Start simple. Take Nanoloom as an example: we make biodegradable fibre using graphene, a new wonder material that is 200 times stronger than steel while being light as a feather at the same time. It can outperform plastics across industries, it doesn’t need specific facilities to biodegrade and it can be cost effective at scale.
That is an easy-to-understand elevator pitch that immediately highlights key features (biodegradability, product potential, and cost-effectiveness). It does not need to be more complex in your initial MVP statement – the detail can come later.
- Strip back the assumed knowledge in what you’re saying. When it comes down to the detail of your tech when you’re speaking to an investor, even if you’re not yourself an expert in the field but part of the company’s business team, you’ve got a much deeper knowledge than your audience. This means you really need to identify and strip back the assumed knowledge in what you’re saying.
In our example case, we need to explain what graphene is (many people still haven’t heard of it). Ok, but lots of people are making things from “graphene”. So then we also need to differentiate our product and to explain that while it is easy to produce, it is also extremely difficult to apply (because you have to bond it to other materials), and accordingly, our product is better than other graphene products because we don’t just pour the graphene in or spray it on other things – we bond it at pre-polymer synthesis. But then, what on earth does that even mean to someone who has no background in chemistry?
My suggested approach is to explain the why, rather than dwelling on the what or how. Why does it matter that we use graphene? Look at the unique properties it can achieve. Why does it matter how we make it? You can actually better retain the graphene’s properties when you use our method and disperse it evenly. Why wouldn’t the market just go with another sustainable material that’s already out there? The material isn’t limited to one application, its key mechanical properties are superior to plastics and it doesn’t need additional infrastructure (e.g. composting) to biodegrade. This avoids your slides turning into a script or walls of text. The how will be dealt with during the due diligence phase, should you make it that far.
- Be bold. There is a similarity between those in academia and in certain disciplines like science or law: the importance placed on evidence that yields a hesitation to give a strong, simple unqualified statement without listing a series of assumptions. Your deck is the hook.
I am not suggesting in any way to stretch the truth about your product, but be bold and clear in what your product can do and why it’s important, and have the data ready to back it up when it’s called for. Do not use fluff or filler words to soften it. Remember, this is what the investor sees before their due diligence exercise, and they won’t get to the due diligence if they’re not interested. “Graphene will be everywhere in five years” (it will, and you don’t want to be the one who misses out), “no one else can do what we do” (they can’t be based on the patents), “our team has unrivalled experience and expertise in all relevant areas” (we do – look at our CVs).
Beyond explaining the tech
Below are some additional key points to be sure you cover in your discussions with investors, as they can set you apart in terms of how attractive your proposition is.
Don’t come across as aspirational
You need to make it clear you have both the product and the application:
- Highlight your patent status and how difficult it is to replicate what you do. This sets you clearly apart from the outset and is the first thing outsiders are interested in and it’s not obvious even if what you’re doing is completely new.
- Show how much work you’ve completed getting to where you are now if you have a working prototype at the cutting edge of our current technology. It won’t necessarily be immediately obvious that where you are now took years of effort. Nanoloom has a fully tested polymer solution that was years in the making and has already undergone an extraordinary amount of testing (which is great news for would-be investors). This builds confidence that it’s not just aspirational, which is among the biggest fears investors have expressed, but is essentially ‘ready to go’.
- Flowing on from that, make it clear (i) the process for scaling (how easy is it to scale production once the funds are in) and (ii) quantify any change in infrastructure that will be needed by third parties for your product to be adopted into the supply chain (or emphasise that none is required).
Be detailed in your projections
You need to do the work upfront to show at a serious level of detail what the expectation is:
- You will need to work harder to show convincing financial projections and costings, so make them as detailed as possible. Rather than using an assumed percentage capture of reported market sizes, we opt to use actual production quantities reported by those who would be our customers in our chosen markets, and it can take some digging to find this data.
- Make it clear whether or not you can achieve low unit costs at scale or, if not, why someone would pay a premium to switch to your product from what they currently use, or adopt it at all.
- Include a detailed timetable showing projected timing to revenue and product roadmap milestones. This shows you’ve thoroughly scoped out the requirements and procedures involved.
Use your competitors
It can be less obvious who your competitors are when you’re doing something at the very cutting edge of technology that can completely disrupt an industry or the way we do things, but you will either be creating a new market or you will have competitors. This is imperative for investors to understand and get comfortable:
- When you’re explaining the structure of your business model and how you’ll make revenue, look for examples of others successfully using a similar and well-tested approach, and highlight these for your audience (i.e. show them the ‘well-trodden’ path to success!). For example, one of the markets Nanoloom is looking at in the near- to medium-term is the fashion industry, and there are many sustainable fibre producers whose products are very different to ours and less versatile, but who have managed to work with fashion houses at the top of the chain to integrate their yarns into products and make sales using a successful, proven business model and showing the appetite in the market for innovations in this space.
- Paint a clear picture of how your product differentiates itself from (i) existing products that have been around for decades and are widely used and (ii) other innovators’ solutions to the challenges you’re addressing. This may be obvious to you, but it won’t be to someone seeing it for the first time, so make sure to adequately trumpet this.
Team, team, team
For any startup, team is the most crucial criterion for investment. Why? Because it is what lends credibility to your ability to execute, and no matter how much work you put into your projections they are still pre-revenue targets based on publicly available data and not past performance.
Showcase your team and their credentials, and don’t be shy about it. This is a big indicator for investors as to the viability of your business regardless of what your startup does. It is ultimately, more so than your projections, what will help them make a determination about whether you’re worth the bet, and is even more important for a hard tech startup.
For Nanoloom, this is one slide where we are guilty of being a bit text-heavy because it forms the basis of our credibility to someone outside the field and can establish the fact that we have extensive nanotechnology, advanced materials, business, textiles, fashion, startup, and legal experience. It is the key to getting our foot in the door.
And to conclude: please persist
You’ll get a lot of “I am interested but I want you to be further along before I commit” along the way. It is tough finding someone ready to take that initial risk, so take the time to bring them along for the journey and show them why your startup is ‘the one’ – make it worth their while. It can become demoralising receiving anything short of total success – you’re trying to change the world for the better, so why aren’t people willing to take the plunge? But the key to a lot of peoples’ success is persistence.
Ultimately, what would be more disappointing is if we heard any more stories about innovators giving up and moving into other fields because they cannot see a light at the end of the tunnel. Positive market sentiment and the appetite for risk continues to rise as we move towards vaccines for COVID-19, and the right investor will come along. I saw a tweet someone shared with me recently (you may have seen it, it became quite popular), with a similar message imploring people to persist in their endeavours. It highlighted the enormous success that The Queen’s Gambit is currently enjoying, and spoke of the fact that it took the producer, Allan Scott, decades of rewrites and rejections to finally get it aired. So I too would selfishly ask that you persist, and bring your game-changing innovation to the world, for everyone’s benefit.