As the world increasingly relies on technology, a new wave of innovation, known as deep tech, has emerged. Deep tech is a broad-based wave of advanced innovation that is consolidating and amplifying breakthroughs from diverse fields such as materials science, quantum computing, synthetic biology, carbon capture, and even space technology. While deep tech ventures aim to solve large and fundamental challenges to society, they face unique challenges in securing funding due to their complex and often lengthy development processes. This blog will explore how startup accelerators and venture funds evaluate deep-tech startups and provide insight into the process involved.
Evaluating Deep Tech Startups
Evaluating deep tech startups is a complex process that requires an understanding of the science behind the technology, as well as an assessment of the startup’s potential for commercialization. There are four basic attributes that successful deep tech ventures share:
- Problem orientation: Deep tech ventures aim to solve large and fundamental challenges to society.
- Use of emerging technologies: They look at using the best existing or emerging technologies to solve the problem at hand.
- Physical and digital innovation: They have shifted from digital innovation—based on bits—to digital and physical innovation—based on bits and atoms.
- Cross-organizational ecosystem: They are catalyzing the emergence of a new cross-organizational ecosystem for investment, support, basic research, and application development.
In evaluating deep tech startups, accelerators and venture capital firms typically look for startups that align with these four attributes. In addition, they evaluate the startup’s team, market potential, and intellectual property. The following are some of the key factors that startup accelerators and venture capital firms consider when evaluating deep tech startups:
The Team
One of the most important factors in evaluating deep tech startups is the team behind the technology. Investors look for teams with deep scientific and technical expertise, as well as experience in commercializing deep tech solutions. Startups with teams that have experience in bringing deep tech solutions to market are often viewed as less risky and more likely to succeed.
Market Potential
Investors also evaluate the market potential for the technology being developed by the startup. Investors look for startups that are addressing a large and growing market, with the potential for significant returns on investment. They evaluate the startup’s potential market size, the competitive landscape, and the barriers to entry for competitors.
Intellectual Property
Intellectual property is another important factor in evaluating deep tech startups. About 70% of deep tech ventures own patents related to their products or services. Investors look for startups with strong intellectual property that can be protected from competitors and provides a competitive advantage in the market.
Commercial Viability
Ultimately, deep tech startups need to have a viable path to commercialization and generate revenue. Investors want to see a clear business model and a roadmap for scaling the product or service. Startups need to demonstrate that they can turn their innovative technology into a profitable business. One way that startup accelerators evaluate the commercial viability of deep tech startups is by assessing the potential market size and the startup’s ability to capture a significant portion of that market. They also look at the startup’s go-to-market strategy, including customer acquisition and distribution channels. Venture capital firms typically evaluate the commercial viability of deep tech startups through due diligence. This process involves a deep dive into the startup’s business model, financials, and market potential. Venture capitalists will often conduct customer interviews to better understand the startup’s value proposition and market fit. They also look at the startup’s traction and revenue projections.
What is The Due Diligence Process
Once the initial screening process is completed and a startup is deemed a potential fit for investment, the next step is conducting a due diligence process. This process is crucial for both accelerators and venture capital firms to minimize risk and maximize returns on their investments. What is the due diligence process for deep tech startups. Due diligence involves a detailed examination of the startup’s technology, business model, financials, market opportunity, team, intellectual property, regulatory compliance, and any potential legal liabilities. For deep tech startups, the due diligence process can be more complex than for traditional startups. This is because deep tech often involves cutting-edge technologies and scientific research, and the risks associated with the development and commercialization of these technologies can be high. As a result, startup accelerators and venture capital firms must evaluate the startup’s technological feasibility, scalability, and intellectual property protection.
One key area of due diligence for deep tech startups is the evaluation of their intellectual property portfolio. Deep tech startups often rely on patents to protect their technology and prevent competitors from entering the market. As mentioned earlier, deep tech ventures own a significant number of patents related to their products or services. Therefore, investors need to understand the strength and scope of the startup’s patents and assess the risk of potential infringement. Another important area of due diligence is the assessment of the startup’s technical team. Deep tech startups require highly skilled and specialized teams with expertise in science, engineering, and mathematics. Investors need to evaluate the team’s technical capabilities and their ability to execute on the startup’s technology roadmap.
Finally, due diligence also involves assessing the startup’s potential market opportunity and competitive landscape. Investors need to understand the startup’s target market, the size of the market, and the potential for growth. They also need to evaluate the startup’s competition and assess the potential for disruption and market share gains.
The Funding Process
Once the due diligence process is completed, and the investors are satisfied with the startup’s potential, the next step is funding. Deep tech startups typically go through several funding rounds, starting with seed funding and progressing to series A, B, and beyond.
Seed Funding:
Seed funding is typically the first round of funding for a deep tech startup. It is usually provided by angel investors or early-stage venture capital firms. The amount of seed funding can range from tens of thousands to several hundred thousand dollars. Seed funding is used to develop a proof of concept or a minimum viable product.
Series A Funding:
Series A funding is the next stage of funding for a deep tech startup. It is typically provided by venture capital firms, and the amount can range from a few million to tens of millions of dollars. Series A funding is used to scale the startup’s technology and build out the team.
Series B and Beyond:
This is the later-stage funding rounds for deep tech startups. They are typically provided by venture capital firms, and the amounts can range from tens of millions to hundreds of millions of dollars. Series B and beyond funding are used to accelerate growth, expand into new markets, and prepare for a potential exit.
In conclusion, deep tech startups present a significant opportunity for startup accelerators and venture capital firms. The potential for disruptive innovation and significant societal impact is high, and the market opportunity for deep tech startups is substantial. However, investing in deep tech startups involves a unique set of challenges and risks. Due to the highly specialized nature of deep tech, investors need to understand the technology, evaluate the team’s technical capabilities, and assess the potential market opportunity carefully. Additionally, investors need to be patient and understand that deep tech startups may require longer development.
Amit Khanna, 7startup Founder
Amit has two decades of experience in the industry and an MBA. He supports entrepreneurs with every aspect of their business including concept and product development, investor presentations, and fundraising. Amit & 7startup assist startups in the pre due-diligence process and help connect them to our vast network of investors. Reach out to us today and see if we’re a fit!
