No matter how cool the tech is, one euro earned in a deep tech startup is worth exactly as much as one euro earned in any other startup – regardless of the “depth” of the technology.
This is not to say that investors shouldn’t be looking at deep tech companies. On the contrary – these companies innovating within climate, health and energy might very well save the world. However, there are a few pitfalls we as investors have to be aware of when investing in deep tech. No matter how much we’d like to invest in your venture, the fact remains that we have to be rational in the companies and technologies we’re betting on. Personally, I wish that startup entrepreneurs bringing new technology to market would grasp this fact better than they sometimes do. The success of venture capital is a factor of the risk we take in relation to the reward our portfolio companies seek. And in deep tech, the road to success is inherently longer than in more commercial businesses, which usually means a greater risk of failure. Investing in a deep tech startup with only a small incremental improvement to today’s existing technologies is a surefire way to lose in the long run.
Look out for incremental improvements
As stated above: If there is one sure-fire way of losing in deep tech, it is to invest in incremental improvements. The easiest way to avoid this is to look for startups that have an innovation that is novel enough to enable something completely new to existing markets. As an investor, I need to understand what this technology, once successfully brought to market, will enable. Quite often, unfortunately, entrepreneurs with a new technological innovation are too focused on the benefits of the technology, so they miss to realize what the technology can actually bring to the market.
Any product or service needs to fulfill the complete needs of customers. In a deep tech startup, true disruption often requires a thorough understanding of your customers at an earlier stage than in “regular” businesses. Solving some of your customers’ needs isn’t enough. To truly succeed, you need to deliver an entire service that can compete with, or even outrank, the status quo.
Sometimes a customer can be kept up at night because of some particular detail in the day-to-day services that they consume. But fixing that particular detail isn’t enough, if you can’t deliver the entire service, and deliver it in a way that is at least on an equal level as the status quo.
Bringing something better to market is therefore definitely a better way to build a startup. What startup entrepreneurs often miss, is that being “better” at something can be very subjective, and must always be measured from the viewpoint of the customer, not the entrepreneur. Excelling in a trivial feature does not make you better, regardless of the enthusiasm that the inventors have for that feature, as complete solutions will always outlast trivial features.
So you’re competing on price… and what else?
I quite often see innovations that are successfully bringing costs down in comparison to products currently on the market. While this is good, is it really enough?
Bringing a cheaper option to the market is good, but does it really enable something new? This is particularly problematic if price is the only benefit you’re offering. Large corporations have huge cost benefits from economies of scale, and startups that are trying to enter a market competing with price will have a hard time doing so. Doing something cheaper in a startup is good in cases where current market leaders have left underserved markets due to price points, but this strategy requires razor sharp execution to maintain the price advantage. Entering an existing market with a lower price as your best selling point will make your journey hard. You will struggle for years with large overhead costs compared to sales, and at the end of the day you might end up attracting customers to whom a cheap price is the only purchase criteria.
Because of this,most valuable deep tech ideas do not compete on price alone. In fact, any good founder will benefit from trying to bring added value to the market. Bringing value also means that customers are willing to pay a premium for getting a novel innovation in their hands. Even if the reality of many startups is that you will have to sell your product at a discount when bringing it to market, the vision should be to bring an innovation to the market that will benefit your customers so highly that a premium is easily justifiable.
Beware of Swiss army knives
Founders bringing a deep tech innovation to market need to be able to provide a vision on the technological development in their domain. As a founder with a new innovation, you need to be able to conceptualize how the technological development within a sector will evolve, and envision how your innovation will fit into that technological evolution. Focusing on only your own technology while disregarding the evolution of your field is probably the main pitfall we see too tech oriented deep tech founders fall into.
Any startup should solve real and large customer problems. However, customers are usually looking for a solution that will last a long time, and will not want to buy a quick fix from a startup. Everyone wants to buy the future. This, in turn, requires you as a founder to be able to convince your customers that your product represents the future of a certain technological domain. This is quite difficult if you are simultaneously focusing on multiple customer segments.
While some innovations can bring great value to many different industries, focusing on a single problem is quite often the best first step on the road to success. If a founder can first deliver a complete solution to a market, the opportunities with the technology becomes a lot more visible, and entering a different market later on becomes much easier. The complete potential of the innovation in different markets can still be a part of the company’s long term vision, but only after the company has proven that it truly can satisfy a specific customer need.
Assess your research teams
We often see deep tech startup teams consisting of only academics that have a strong theoretical understanding of their field but lack practical experience or the ability to apply their knowledge in a business setting. This can lead to difficulty in making decisions, executing plans and adapting to changes.
One way to mitigate this is by bringing on team members with industry experience or by seeking out mentors or advisors with practical experience. Additionally, the team can actively seek out opportunities for hands-on learning and experimentation, such as through internships or pilot projects. Another way to mitigate this is by surrounding the team with people with diverse backgrounds, who can bring in new perspectives. This can be done by hiring people with various educational or professional backgrounds, or by working with people from different cultures or industries.
Finally, it’s important to keep in mind that while a strong theoretical understanding is important, it’s equally important to be able to apply that knowledge to the real world. At the end of the day, it is the team’s ability to solve a customer problem that will ultimately determine the success of any business. Supporting the team in momentarily setting aside its invention to focus on the customer needs is crucial for long-term success, particularly in deep tech startups.
A blue ocean strategy is highly preferable when you are bringing a groundbreaking new technology to market. It’s always worth stopping and asking yourself – are the benefits of my invention self evident? Technical implementation is always hard, no matter the market, so a great deep tech team with a deep understanding of the customer needs and pain points are always more likely to successfully develop a compelling value proposition that addresses these needs.
Overall, deep tech startups can be a high-risk, high-reward investment opportunity, and investors should carefully consider their risk tolerance and financial goals before venturing into deep tech. When the investors have a great understanding of the most common pitfalls, it’s easier to support the deep tech teams and make truly rewarding investments. In turn, a deep tech founder can benefit from reading up on the most common pitfalls, in order to successfully navigate them.
Even though it’s not the easiest industry, I’m certain it’s one of the most rewarding ones.
Written by Pontus Stråhlman, Partner at Voima Ventures