DEEP TECH GUIDE TO RAISING CAPITAL: 10 THINGS SEED STAGE VC FUNDS SEEK
Raising seed-stage capital is one of the most challenging things that an entrepreneur will do.
It is difficult for Canadian Deep Tech startups because capital is limited, and Deep Tech startups can lack the traditional criteria sought by traditional VCs.
There are many articles focused on the different categories that investors consider to evaluate a company’s value. Most of them boil down to what we call the 4 Ts:
Most investors use an arithmetic score aggregation to assess if a startup qualifies for financing.
In early-stage Deep Tech, however, things are different.
Most early-stage Deep Tech startups are strong in technology but get few points in the Team, Traction, and Timing categories. This hampers their chances of getting a second meeting with a traditional VC.
At RiSC Capital, we subdivided the 4 Ts into ten sub-categories. We changed how we look at each of the 4 Ts and, as important, how we aggregate the scores to form our investment thesis.
Here is how we break down our Deep Tech framework.
1. People: In addition to team dynamics, integrity, and leadership, we look for domain expertise, academic history, and awards. We like geeks and nerds who solve problems on their lunch break.
2. Leadership: What are your motivations, and can you motivate other people? Do you want to remain founder/head of research, or be the company’s CEO?
3. IP: What is the technology, and is it protected? We assess the barriers to entry and the tech’s scalability.
4. Application: While technology is essential, how well is it applied in the real world where customers will pay for it? Is it ten times better and less expensive? Are there more applications?
5. Proof of concept: Is there a product or at least a minimum viable product? Do the product and technology work? Are customers using it, including trials?
6. Competition: What is the competitive landscape? Assessing competitors can be a challenge at an early stage, but you can identify substitute products/indirect competitors.
7. Sales: Has there been product-focused revenue or paid trials? What are the customer acquisition model and sales pipeline?
8. Plan: What is the plan going forward from a hiring, tech roadmap, projections, and strategy perspective?
9. Dollars: What is the cost to get the company from here to the next milestone? The milestones are different in Deep Tech. How successfully has a company’s founder raised grants and other non-dilutive financings (IRAP, NSERC, SR&ED)? What is a normalized monthly burn rate if the company is spun out of a university lab? Has the company raised NRE from any of its customers?
10. Market: How big is the market? Is it scalable (size and growth)? While the IP is often innovative and disruptive, the market’s size in five years is unknown, but it needs to be at least $100-million.
Even though Deep Tech investing is tech-focused investing, we still require the best set of people, traction, and a market.
How we put everything together involves some magic. Deep Tech startups want to have as many as the ten sub-categories covered as possible, but that is not realistic in many cases.
We focus on the strength of the technology and identify the gaps in the other areas. If the tech is innovative and disruptive, it offers exciting potential for compelling commercial applications.