Deep tech startups with very technical CEOs raise larger rounds, research finds

SaaS founders trying to figure out what it takes to raise their next round can refer to Point Nine's famous yearly SaaS Funding Napkin. (The term refers to "back of the napkin" plans or calculations.)

Now European hardware deep tech teams have a similar resource from First Momentum, a pre-seed fund investing in technical B2B and deep tech startups.

With its Deep Tech Hardware Napkin, the German VC firm hopes to democratize knowledge and benchmarks on funding, team, product ,and commercialization, broken down by stage. It focuses on Europe's blossoming deep tech sector, which gives quite different results from what one might see in global SaaS.

Benchmarks are particularly helpful to first-time founders or those without a big network in startups and VC. This is especially true in deep tech, where many entrepreneurs come from a research background. "They don't know what's a wrong decision or a good one, because they don't have data on it; they are not in entrepreneurial circles, they don't have 10 to 15 friends who have started companies before," general partner David Meiborg told TechCrunch.

First Momentum conducted a survey of 30 deep tech VCs from eight countries to counter this lack of knowledge and opaqueness, Meiborg said. The results are compiled not only in a "napkin" but also a full report.

The firm kept its observations to a minimum in the report, as it wanted it to be objective. But Meiborg and Maximilian Ochs (one of the members of First Momentum's investment team) agreed to discuss with TechCrunch one interesting finding: "At seed and Series A, teams led by very technical CEOs (with no business background) raise significantly more funding than teams led by CEOs with a business-related background."

There's a bit of sample bias at play: "Startups that pop up in our survey are relatively successful for a given stage because they either raised VC money, or they're about to." This means that the technical CEOs in the sample aren't fully representative; if they managed to raise funding, it's likely because they also have commercial savviness.

Nonetheless, it shows that founders with technical profiles can benefit greatly if they add business skills and knowledge to their toolset. With a strong pipeline of university spinouts, there's a lot that Europe can achieve if founders can get it right.

First Momentum hopes to help these technical founders not only with this report but also with a community called Clueless No More, where aspiring "European scientist entrepreneurs" can learn from each other. For instance, they can discuss a sore point brought up by Runa Capital associate Francesco Ricciuti: "Cap tables matter. Don't let poor technology transfer reduce your chances of success," he cautioned in the report.

How deep tech differs: Bigger rounds, longer road to success

The report notes that pre-seed and Series A deep tech hardware rounds were bigger in 2023 than in 2022, which First Momentum interprets as indicating growing investor appetite for the sector. The data checks out: Globally, deep tech claims a 20% share of venture capital funding, up from about 10% a decade ago. Some of this is the nature of the sector: Because deep tech requires significant upfront investment, rounds have been typically larger than average.

Intuitively, Meiborg already knew that the data would look different from the average startup. "The specific thing about deep tech investing is that you mainly take on technical risk, but it gets compensated by less market or commercialization risk," he said. He gave the example of a startup that would find a cancer cure: Hard to do, but not hard to sell.

This explains the report's finding that even at the Series A stage, only 29% of startups have reached a repeatable sales motion and meaningful revenue. Ochs didn't find this surprising but saw this as a confirmation that getting to revenue takes time for a deep tech startup.

This requires reverse engineering, Ochs said: Entrepreneurs need to identify which milestones they can reach to get investors to finance their next round. First Momentum also refers to the process as "de-risking," with Ochs suggesting to founders to understand their costs, the gross margins they can realistically achieve, and how expensive their end goal is.

Julien Macquet and Clement Van Driessen from Elaia, one of the VC firms that took part in the survey, also referred to the Series A hurdle, telling TechCrunch, "where many hardware startups struggle due to insufficient proof of market fit." According to the duo, this requires a strategic approach with substantial capital -- ideally from global investors.

https://techcrunch.com/2024/03/13/elaia-deep-tech-european-dynamism

"Engaging a global investor syndication from day one ensures not only the necessary funding for this capex-intensive journey but also fosters critical support to achieve key business milestones," they observed.