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How to secure VC funding for your deep tech start-up

14/04/2022

 Deep tech is being marked as the 4th wave of innovation...

​...however according to DeepTech Investing Report 2020 deep tech ventures are not receiving VC investments until at least their 4th year of operation. This clearly shows the difficulty for them in fundraising in the early stage, making it crucial for funders to find a way to improve the investment readiness of their business.

The first supersonic plane after the Tupolev, the synthetic biology revolution, flying taxis, a vaccine for COVID developed in nine months with a novel mRNA approach... What do these innovations all have in common? They are all driven by deep tech ventures, and they represent only a small fraction of what start-ups can achieve today.

The potential is huge and concrete. Just look at Tesla and SpaceX to see how new ventures can turn industries upside down to grasp deep tech's potential. Despite all its potential, there are still several challenges to the growth of deep tech and, one of the main, is accessing early-stage funding.

META investment readiness program 

In this context, META, under InvestHorizon project, has supported more than 200 European early-stage deep tech ventures over the last three years, which have ultimately raised more than 230M€, with an average ticket of 2,5M€ and an average timeframe to close a deal after participating in the program of 9 months. How have we been able to achieve these results?

We offered a different -new approach- to address investment readiness based on two main elements:

  1. Peer-to-peer approach à Exchanging experiences with other CEOs: CEOs of deep tech start-ups received feedback on specific business challenges from other European deep tech peers.
  2. Presenting to investors à Getting in touch with the right investors: deep tech startups were matched and presented to tailored groups of deep tech investors.

Access funding paradox

Deep tech investment is on the rise: disclosed funding amounts increased from about $15 billion in 2016 to more than $60 billion in 2020. Nevertheless, deep tech ventures experience issues moving from grant funding to equity. Almost 50% of grant-funded deep tech ventures require several rounds of grants before succeeding at attracting VC funding. This is confirmed by the latest BCG and Hello Tomorrow survey, where 41% of deep tech ventures stated that "there is more security with grant funding than with equity funding."

Paradoxically, investment "dry powder" is at record levels (with a total of $1.9 trillion in December 2020, of which $1.1 trillion is in Private Equity; $331 billion Venture Capital; and $250 billion is Growth Capital). These record sums are driven by PE & VC funds raising capital from LPs more easily than ever before.

Therefore, although there is a lot of money in the VC ecosystem and even if VC investors are aware of the huge opportunity behind deep tech, early-stage enterprises are struggling in fundraising compared to their "cousins" in the digital landscape.

Why is this happening? There are many different reasons behind this, however, most of them are related to VC industry standards and ecosystem issues. So, if deep tech venture founders would like to increase their chances to raise money, what should they do?

Investment readiness 

Deep technology is usually developed by privileged researchers in well-equipped laboratories operating within a small community of vertical experts. Thus, deep tech entrepreneurs are often scientists who are passionate about their technology. They are excellent at science, but less able to build the narrative that start-ups need to capture the attention of investors, thus, they are not "investor ready". Investment readiness is the capacity of an entrepreneur, who is looking for finance, to understand the expectations of an investor and to be able to respond to them.

This is the reason why it is crucial for deep tech teams to increase their investment readiness if they are looking to raise funds.

European landscape

To better understand how deep tech start-ups address investment readiness issues and which solutions they adopt, META Group interviewed 45 CEOs of such companies.

The main challenge to access funding for deep tech start-ups in EU is the proper matching with the investors, as 34% of the interviewees identified it as the biggest obstacle. In the same way, CEOs find it difficult to identify and access the right network of investors, as starting from scratch could be frustrating.  In addition, respondents warned about the difficulty of meeting the investors' expectations when approaching them. Last but not least, creating the right narrative (pitch deck) to investors it is also a big challenge.

How are start-ups dealing with these access-funding problems? Nearly a 40% of interviewees, are participating in pitch events and workshops with the aim of increasing their investors' network. Others are seeking external support, such as consultants, bankers or incubation programs.

It has to be noted that, more than 30% of CEOs interviewed stated that they have to spend too much time in scouting for investors, presenting and participating in pitch events and even these solutions do not guarantee any success. They said how frustrating it is to spend time pitching at events and then having to realise that the investors' network behind it is poor or not tailored, or not receiving feedback from investors after the pitch. Finally, respondents stated that incubation programs available in the industry are too standard, covering basic topics based on "frontal lessons" that do not bring value to the participants.

Are you a deep tech early-stage investor interested in accessing top quality deal flow or are you a deep tech venture CEO willing to increase your investment readiness? Email us at info@meta-group.com.