Early Stage Deep Tech Deal Killer

Investors and early-stage deep tech startups must navigate a landscape riddled with uncertainties and unknowns when they engage in the initial evaluation process.

The complexities of this first step usually involve conveying the vision, managing assumptions, addressing information asymmetry, and building trust. However, some mistakes can be deal-breakers, jeopardizing even the most promising ventures. Successful founders are proactive in identifying and rectifying factors within their control. For deep tech founders, some of these deal-killer mistakes have their intricacies, so I decided to address them here but using a very well-known mode of startup evaluation, aka 4Ts.

The famous 4Ts of startup evaluation

The Team

Deep tech startups require specialized technical knowledge and expertise. Investors assess whether the founding team possesses the necessary skills and experience to execute their vision successfully. Here is a list of things I have seen that have killed a deep tech deal:

1. Inexperienced or unqualified team. When the founding team lacks relevant industry experience, technical expertise, or a track record of success
2. Weak or unbalanced team composition. When the team lacks key roles or the necessary expertise to tackle various aspects of the business.
3. Founders’ conflicts or misalignment. When internal disputes among founders or a lack of alignment on the company’s vision, goals, or strategy are too obvious.
4. Poor communication. When the founders cannot communicate the vision.
5. Lack of market understanding. If the team demonstrate a lack of market knowledge, fails to articulate a compelling market strategy, or struggles to address questions.
6. Overdependence on a single individual. Relying heavily on a single founder or team member for critical aspects of the business
7. Ethical or integrity concerns. Investors place significant importance on the integrity and ethical conduct of the team. Any history of unethical behaviour, legal issues, or questionable practices can be a major deal killer, posing reputational and legal risks to the startup.
8. Lack of diversity and inclusion. Investors increasingly recognize the value of diversity and inclusion in driving innovation and decision-making.

A legendary team of humans, a wizard, a dwarf, an elf and halflings. The team is key to success. Have an amazing team and a mediocre solution, and you have a higher chance of success than a mediocre team and a great solution.

The Tech and IP

1. Weak or insufficient intellectual property (IP) protection. Investors seek assurance that the startup has a robust IP protection strategy.
2. Patent-related challenges. If the patents are likely to be invalidated, have narrow claims, or can be easily circumvented by alternative technologies. Patent disputes or ongoing litigation can also raise red flags.
3. Infringement risks. Deep tech startups must ensure that their technology does not infringe on existing patents or the intellectual property rights of others.
4. Lack of technical feasibility. If the technology requires extensive resources for implementation or lacks a clear path to commercialization, investors may question the viability and potential returns on investment.
5. Technological obsolescence. The risk of becoming obsolete due to emerging alternatives or disruptive innovations. Demonstrating adaptability and the ability to stay ahead of the market is crucial.
6. Lack of proof of concept or validation. It can raise doubts if the startup lacks successful pilot studies or prototypes or confirmation from industry experts or potential customers.
7. Lack of Scalability, reliability, safety, or performance of the technology.
8. Complex regulatory or compliance requirements. If the startup’s technology faces significant regulatory hurdles, lacks a clear strategy to navigate compliance, or operates in a highly regulated industry without adequate plans to address regulatory challenges, it can be a barrier to investment.
9. Lack of a compelling value proposition or differentiation

When you take “fake it till you make it” very seriously. (Image from FT)

The TAM

Deep tech companies must be targeting a massive challenge. I have previously defined the deep tech sector, where there is no market risk and some technology risk. So show the investors there is no market risk. Here is a list of items related to the market and its size that have killed deals:

1. Small or niche market. Very small or very niche markets with limited growth prospects.
2. Lack of scalability. Markets inherently limited in size or not allowing for significant expansion.
3. Saturation or declining market. A market already crowded with competitors or experiencing a decline.
4. Inadequate market validation. Lack of sufficient market research, customer interest, or early traction to support the growth projections.
5. Limited market accessibility. Some markets may be challenging to penetrate due to regulatory barriers, geographic limitations, or other factors.

The GM EV-1, was available between 1996 and 1999. GM ultimately decided that electric vehicles were too niche, controversially scrapping the program and sending most EV-1s to the crushers. [This was more of a timing problem than a market size problem]

The Timing

The timing of a deep tech startup can play a crucial role in determining whether an investment deal will be successful. Here are some factors related to timing that could kill an investment deal:

1. Market readiness and timing mismatch. The timing may be unfavourable if the market is not ready for the technology or the technology is out of sync with prevailing trends, customer preferences, or emerging technologies.
2. Slow adoption. If the deep tech startup operates in an industry that is slow to adopt new technologies or if there are significant barriers to entry.
3. Competitive landscape. Timing is crucial in deep tech startups because other companies may be working on similar or competing solutions.
4. Funding environment. The overall funding climate and economic conditions can impact investment decisions. During periods of economic downturn or tight capital markets, VCs may be more cautious and conservative in their investment strategies, making it challenging for deep tech startups to secure funding. [very relevant for 2022–2024 period]
5. Limited runway. Deep tech startups often require significant time and resources to develop and commercialize their technology. If the startup has a limited runway or insufficient capital to reach critical milestones within a reasonable timeframe, it may deter potential investors.

Where is your tech in the hype cycle?

As Mr. Buffet says, “It’s good to learn from your mistakes. It’s better to learn from other people’s mistakes.” What have you seen go wrong? Let me know where it should be expanded.