How should deeptech founders convince VCs to invest in their startup?

That’s the question posed at Bloc Ventures & Silicon Valley Bank ’s event ’From PoC to IPO (or not): the journey of a deeptech company ’ in Cambridge.??

Deeptech Labs CEO Miles Kirby joined an esteemed panel with Dr Elaine Loukes ( Cambridge Enterprise ); Rick (Jingchun) Hao ( Speedinvest ); Dr Lee Thornton ( Longview Innovation ) and Pete Hutton ( Cambridge Angels ) - chaired by Bloc Ventures Investment Manager Dr Alisa Molotova - to discuss how deeptech founders can prepare for the journey ahead, connect with investors and how a network of entrepreneurs who’ve “been there done that” can accelerate the business.

Q: Can you talk us through what you are looking for in an early stage team? How can they convince you to invest in them?

Miles Kirby (Deeptech Labs)

As a deeptech entrepreneur, you’re clearly excited about your technology - so when you're talking to a venture capitalist you’ll want to talk about your technology. But ultimately the venture capitalist is not going to invest because you've got the sexiest technology. They're going to invest because they think that you can return a lot more money than they put in. So make sure you are thinking about that. If that VC has to fill in the dots from; ‘Okay, great technology but what's the business model?’. That's a lot of work and they may not get there.?

You really need to be able to sell that you've got something really interesting that will return value to them as your investor. And you don't have to go into the minutiae of the technology in the first call. The purpose of your first meeting is to get the VC excited enough to take the second meeting, and then the third - then hopefully go to the Investment Committee and give you the funding. But to start off with, get them brought into the business - not the minutiae of the technology.

Pete Hutton (Cambridge Angels)?

As a tech startup, you will need a technologist and the anti-technologist, a.k.a. someone who can explain the business to investors in under 10 minutes. Most technologists can’t necessarily do that. So you need someone who can come in, boil it down and explain it crisply. You also need someone (a VP of Engineering or a CTO) who can go in and actually talk to customers. Lots of technologists, and I’m guilty of this as well, go in and tell customers how great the technology is but don’t ask obvious questions like do you actually need the technology? What problem am I solving? Do you have any money? So normally I’m looking for at least two founders plus advisors. This isn’t to derisk having one founder - there’s just a lot of work to be done.?

Rick Hao (Speedinvest)

We've been running for 11 years and we invest in more than 200 portfolio companies and we’ve started doing lots of investment in Cambridge, because it's very reputable. And compared with other ecosystems in Europe, we do see that Cambridge has one of the best ecosystems. We’re focused on seed and pre-seed investment. So 80% of our decision is, I would say, about the founders. So that's why we always prefer to know the founders earlier, even though they might just have an idea.?

Even so, they need to show how the technology could work and how they can build a successful venture. So first and foremost, what we are interested in seeing is how the technology works and how you can build a product out of it. You also need to demonstrate that you understand the market, that there's a need for your product. A solution looking for a problem is common for deeptech. We accept that, but most of the time we want to see that there is a demand for the product.?

Dr Lee Thornton (IP Group)?

Probably the main thing missing from pitches is an explanation of the exit story. How does the investor actually make money? Very few founders actually cover that in any detail. So talking about how much money you will need over the course of the company is important. It doesn’t need to be perfect and you haven’t got to know everything, but just some indication of how much the investor will have to put in and then how much they might make out it always catches my eye. Because it’s rarely seen.?

And then secondly, on top of that, is to talk about why the investor in front of you is a good fit for your company. Not all investors are the same. The best thing you can do is tell the investor why you think your company is a good fit for their fund.?

Q: How can a deeptech start-up find their product market fit?

Dr Elaine Loukes (Cambridge Enterprise)

A pitfall to watch out for is that in your search for who's going to buy my product, you're probably going to get some big, big stellar companies going; ‘This is amazing. Let's talk’. And you’ll get some sort of agreement with a small amount upfront, but I think a lot of the companies use startups as very cheap R&D.?

And I think you have to be very, very careful who you're talking to in these companies, because quite often you're probably speaking to the engineering team, who probably genuinely do love your technology and are personally interested in it. But if they haven’t got the ear of the people that are going to make the financial decisions, you could find yourself going down a tunnel that actually you don't get anything back from. So be really, really careful with who you're engaging with and put all your eggs in one basket because they may take advantage.?

Miles Kirby (Deeptech Labs)

You should be asking what is the roadmap to commercialization? Who actually makes the decision? Because these projects can kill your company if you spend all your time and resources with a big customer and it goes nowhere.?

Q: How can we kind of foster inclusive practices in our portfolio companies and also how can we, as investors, can make deeptech more inclusive as well?

Dr Elaine Loukes (Cambridge Enterprise)

Try and put yourself in other people's positions and don’t just recruit in your own image. I think the best person should get the job, but the system's got to support everybody coming up through the system in a fair way. And it's not, it’s still biased. So I think the change has to come from every single one of us. Boards should constantly be looking at diversity. There's lots of studies that show the business benefits of diversity. I started in venture 20 years ago and I was always the only female on the board. We're good at talking about how important diversity is these days but look at the people pages of investor websites and all too often, it’s all men at the top.?

Q: So the risk associated with deep tech investing at the early stages, what are your top risks and how do you manage them??

Dr Lee Thornton (IP Group)?

One of the top risks we look for at the early-stage is probably funding risk. There aren’t many investors who come in early - there's maybe 10 in the UK really who would do genuinely early-stage, especially in something that's deeptech or hardware. So the funding risk is not being able to continue on from your seed round to your Pre-Series A. Beyond that it starts to get a bit easier. So I think one of the things a founder can do to derisk things for the investor is explain how would you fund this moving forward? Who else might you approach and what do they think about it??

Q: Do government grants help or hinder the founders? Are they treated a bit like free money and hence the heavy focus on the technology front rather than on commercials??

Miles Kirby (Deeptech Labs)

In the early stage, I think grants are a great way to go because they extend your runway and you get to prove out the technology. Ultimately, when you're going to a VC, this helps them assess how much your technology is derisked. And if you can get further with grants and get more proof points, that drives your valuation higher because the risk is lower.?

That said, the thing you have to be really careful of with grant funding is that you don't turn down a dead-end road because that's where the grant money happens to be. You need to be clear on what your product roadmap is and find grants that will take you that direction. If they're taking you down that dead-end road, don't try to repurpose them.?

Dr Elaine Loukes (Cambridge Enterprise)

You're right Miles. And also they aren't free money. There's a lot of management and reporting and all the rest of it - so for a small grant, the overhead is tough.

Q: How do you as investors make your money smart and what do you provide beyond capital to founders??

Miles Kirby (Deeptech Labs)

At Deeptech Labs, we're all about helping companies between their funding round and their Series A accelerate. This means from going from the point where you have a technology that looks like it works, to building the foundations of a really strong business. How we do that is we run a 13 week accelerator program. Take today as an example. I spent four hours with our cohort companies working through fundraising asking questions like, “What should your story be? Who should you be pitching to? How much should you raise?” Each week during the programme, we have a fireside chat on the topic of the week - that might be intellectual property, long term vision, raising Series A, product market fit, going to market etc.?

We call ourselves a catalyst because we bring in over a hundred people to talk to our cohort companies during the programme - fantastic, experienced advisors from our network, and who have a huge diversity of thinking and experience. And we think that's absolutely critical to building that foundation before you raise Series A and beyond.?

I've seen so many promising deeptech companies fail between Seed and Series A. The technology isn’t the reason. They don't know how to go to market and have burnt through their Seed money. The founders get a bridge round… and then they’re done because they won't be able to show value. That's a common scenario in deeptech that we were set up to fix.?

Rick Hao (Speedinvest)

We are actually a very large team, with 87 people across Europe. And half of our team are not actually investors. They're part of our operational support platform team - inhouse experts in HR, sales, business development - all kinds of different areas. So beyond the money, we can basically cover any of those early-stage, operational side of things.?

Dr Lee Thornton (IP Group)?

Most of us at IP Group tend to have science backgrounds. Most of us probably are PhDs and have had some experience in the research environment. So we tend to use that. We draw on that skill, maybe not the specifics of what we know, but the general approach and understanding what it means to have a good piece of science in front of you. We draw on that experience to try and understand and therefore de-risk our early stage investment.?

Pete Hutton (Cambridge Angels)?

At Cambridge Angels, there's about 60 of us and we help in a couple of ways. They're mostly ex entrepreneurs so if companies get stuck, I can go ‘hey, Phil come and help’. The other thing we do is we go through a fairly good review process for pitch decks. Even people who don't get money quite enjoy the process, because there's a lot of feedback and sometimes there are introductions to other VCs.?

Dr Elaine Loukes (Cambridge Enterprise)

We're very, very patient, which is really important because some technology is going to take quite a while to come out. We’ve got the Tech Transfer office, so they can do a really rigorous review of the IP landscape and help you licence your technology. We are one hundred percent part of the university, so we've got the entire Cambridge University Network as well so we obviously leverage that too as much as we can.?

Miles Kirby (Deeptech Labs)

If you are a deeptech founder and found this discussion useful but have more questions about how to accelerate your company, feel free to reach out to me on LinkedIn.