Deeptech is a challenging frontier where groundbreaking ideas often face prolonged timelines before they reach the market.
For European deeptech founders, especially in sectors like medtech where time to markets can easily exceed four years, this can mean facing a common but frustrating response from VCs: “Come back when you’re closer to the market.”
This chicken-and-egg problem is quite common in deeptech fundraising: securing funding is tough without market proximity, yet approaching the market is difficult without adequate funding.
European founders don’t get tired of complaining about the risk aversion and lack of understanding behind these statements, but the tough truth is that in 2023 and 2024, while investors still love big visions, they also want marketable MVPs in the short term.
Building a deeptech startup with a long horizon until profitability is immensely challenging, given the substantial research and development costs (and risks) typically involved.
It takes a village to raise a child and the same is true for a venture.
The usual playbook for low-tech ventures, which still dominate the European venture scene, does not fully apply. And yet, founders and funders on this side of the pond too often still try to play the deeptech game using low-tech rules.
Deeptech venturing requires a careful balance of sustaining operations, minimising costs and potentially leveraging early, less capital-intensive opportunities to generate revenue. Both authors of this article know the deeptech journey firsthand and here are some of our shared learnings that we hope will make your journey easier.
Understand where VCs are coming from
Grasping the VC mindset is essential. Generally, VCs are calibrated towards short-term returns, a preference rooted in their fund structures and investor expectations.
These funds often have a defined lifecycle, typically seven to ten years, within which they need to invest, nurture and exit their portfolio companies to deliver returns to their stakeholders. This timeline naturally inclines VCs towards ventures that promise quicker market entry and revenue generation.
Long gestation projects, common in deeptech, disrupt these timelines, increasing both the perceived and actual risks. This misalignment of timelines and risk profiles compels deeptech entrepreneurs to look beyond traditional VC models.
They must seek out investors who not only understand the inherent timelines and complexities of deeptech but are also committed to supporting innovation over extended periods.
These investors might include evergreen funds, patient capital sources or sector-specific funds that are structured to accommodate and nurture long-term technological developments, aligning more closely with the developmental horizons of deeptech ventures.
As a rule of thumb: don’t go by an investor’s website copy, go by their previous investments and check if they have team members with STEM backgrounds who really know what questions to ask.
Do it like Tarzan, if you must
If it becomes too challenging to get the larger funding that you need all at once, stop angsting about building a full round and consider going for a ‘funding phase’ instead.
We call it the ‘Tarzan mode’, swinging from vine to vine (or rather: convertible loan to convertible loan), and it worked well for Sven in his venture Halitus.
In the absence of large funding availability, it allows you to gradually build up your company, securing smaller, frequent investments which allow for sustained momentum and growth.
It’s slower, of course, but at least you progress, and the approach not only demonstrates the company’s resilience and financial discipline but also helps attract important supporters early on, signalling frugality and grit to future investors.
However, despite its benefits, 'Tarzan mode' has its challenges; it requires a baseline of capital to be effective, particularly in accessing larger, non-dilutive grants which often have stringent liquidity requirements. Without this minimum capital, startups may find themselves unable to leverage these critical funding opportunities, potentially hindering their long-term growth and development. And frankly — most European deeptech startups have a solid grant strategy and investors also expect to see one.
And honestly, Tarzan mode is quite stressful when you don’t yet see the next vine to hold on to.
A far more important component is that it can take a lot of time to sit down with potential investors, maintain the data room and correctly categorise company valuations and develop them plausibly.
This time is then lacking in other areas of your company such as sales, development, HR, etc.
There is only a limited amount of time per day, especially for smaller teams. Therefore, what you energise always grows.
Understand that having paying customers is about more than just revenue
Securing paying customers is a watershed moment for deeptech startups, far surpassing the immediate financial gain. These early adopters are a tangible validation of the market’s demand for the innovation, serving as a robust endorsement of the startup’s potential and market viability.
This is particularly crucial in deeptech, where the product’s complexity and novelty can make a theoretical market fit ambiguous. Paying customers act as a litmus test, offering real-world proof that the product not only meets a market need but does so in a way that customers are willing to pay for.
This validation is invaluable in discussions with investors, significantly de-risking the venture in their eyes. Moreover, these early customers provide vital feedback, offering insights into the product’s strengths, areas for improvement and potential new applications.
This feedback loop is essential for continuous product refinement and strategic alignment with market needs, guiding the startup through its early stages of growth and helping to shape its future trajectory.
“You’re risk stacking: you have an R&D risk, a regulatory risk, a funding risk, a manufacturing risk, a market adoption risk and a reimbursement risk. And the problem is: these risks don’t just add up, they multiply.” — An investor to Sven in an earlier stage pitch. His company has since evolved and managed to de-stack these risks, largely thanks to this type of investor feedback.
Fuck that laser focus, but do it wisely
A wise startup adage reminds us that "startups die of indigestion rather than starvation."
This is true, of course, but in deeptech, the conventional mantra of laser focus doesn’t always align with practical realities, especially when the long-term goal, though groundbreaking, isn’t immediately fundable. This situation often necessitates intermediary steps that are more readily commercialisable to bridge funding gaps.
“I need you to find a creative commercialisation strategy, then we should talk again.” - High-profile US investor to Sven, a year ago
For founders who possess a multi-use platform, it would be imprudent to overlook opportunities for earlier monetisation.
However, startups typically face resource constraints that could limit their ability to exploit these opportunities. To navigate this, strategic partnerships and licensing agreements can be invaluable tools. These arrangements allow for asset-light revenue generation, which requires minimal distraction from the core mission.
At Halitus, we began to offer licensing our IP to industry leaders with large installed bases and partnered with a more mature startup whose products we could sell since they weren’t competition but fit well into our core narrative.
By leveraging such collaborations, startups can generate essential income streams without diluting their focus or overextending their resources. This approach not only aids in sustaining the company through its early stages but also supplies it with invaluable customer insights.
The key lies not in chasing every opportunity but in discerning which ones align best with the startup’s core competencies and long-term vision.
It’s a marathon, not a sprint
Embarking on a long-term venture in entrepreneurship is akin to running a marathon, where success hinges not just on speed, but also on stamina, strategic planning and resilience.
Such endeavours require a steadfast vision, careful resource management and a focus on strategically important milestones aimed at enhancing fundability and achieving sustainable revenue.
Equally important is the founder’s personal wellbeing and growth; maintaining physical and mental health through regular exercise, healthy eating and mindfulness practices is essential.
Fostering meaningful relationships and continuously learning from others’ experiences are crucial for resilience and success in this challenging yet rewarding entrepreneurial journey.
It takes a village to raise a child and the same is true for a venture. The more support you can get from your colleagues, other founders, investors, friends and family — and the better you are at listening to them (and knowing who to listen to) — the better your chances of long-term success.
In challenging times, the instinct to experiment with every available option can be strong. However, successful entrepreneurship involves more than just casting a wide net; it requires a strategic balance between exploring diverse opportunities and maintaining a steadfast focus on your core objectives.
We trust that the insights shared here will aid you in remaining composed and purposeful in your actions. Remember, encountering setbacks or rejections from investors is part of the journey. The key is to persist and align with the right partners who share your vision.
Ultimately, the path to success is paved not just by your decisions but also by collaborating with the right people, including investors who truly believe in your venture.