Welcome to the 42nd episode of Deep Tech Catalyst, the channel by The Scenarionist where science meets venture!
In this episode, I had the pleasure of chatting with Dee Zheng, Managing Director at Orca Climate Fund, to decode the critical differences between the pre-seed and seed stages in Deep Tech and share real-world case studies from the Climate Tech sector.
Key Themes Covered:
🪜 Aligning Funding Stages with Company Development in Early-Stage Deep Tech Ventures
📈 Decoding Pre-Seed and Seed Stages in Deep Tech
🌱 2 Contrasting Case Studies in Climate Tech
🤝 How to Target the Right Investors for Your Early-Stage Deep Tech Startup
🎯 Founder-Market Fit and Market Validation: Highlighting Strengths in Pre-seed Fundraising
🎧 Prefer to Listen?
KEY INSIGHTS FROM THE EPISODE
🪜 Aligning Funding Stages with Company Development in Early-Stage Deep Tech Ventures
It's important to note that dynamics can vary significantly between sectors, even within the same vertical.
Climate tech, for example, encompasses a wide range of sectors and the funding landscape can differ greatly. Some startups, like a consumer-facing startup focused on home energy storage, may begin with substantial seed funding—around $300 million. Others might struggle to raise even $500,000 for basic equipment.
Founders should focus less on the labels of funding stages and more on leveraging their own strengths.
For example, a startup can begin by identifying a niche market after participating in a competitive industry challenge. This would allow them to grow from a small operation into a larger program that accelerated their development from pre-seed to seed stages.
On the other hand, startups led by founders with highly notable backgrounds often find it easier to raise venture capital, given their established credibility. Similarly, companies working with major industry partners tend to attract significant interest from venture capital, especially when they have the potential to scale from initial founding stages to public offerings.
📈 Decoding Pre-Seed and Seed Stages in Deep Tech
To delve into the nuances of funding terms, let's first clarify what we typically discuss during early funding stages, like pre-seed and seed rounds.
There’s extensive data and numerous resources detailing what these terms mean, particularly in the SaaS industry—outlining what investors expect when a founder seeks pre-seed or seed funding. However, in Deep Tech, the dynamics are often more complex due to the longer development cycles, higher capital needs, and technological uncertainty that these ventures face.
So, the distinction between pre-seed and seed rounds primarily revolves around the maturity of the company idea.
In general, pre-seed funding involves individuals or teams with a developed concept but not necessarily a market-ready product.
Metrics such as TRL (Technology Readiness Level) are commonly used to gauge a manufacturer's readiness from a technical standpoint, particularly useful for scientists and entrepreneurs with specialized expertise.
From a VC perspective, readiness for the market is key.
At the pre-seed stage, the focus is on initiating discussions, identifying design partners, and understanding customer pain points. By the seed stage, you should ideally have a design partner on board, initial prototype ideas in progress, and possibly a few pilot projects underway.
Moving beyond the seed stage, investors often look for more concrete evidence of progress, such as paid pilot projects and trial sites that may not be fully scaled but are substantial enough to demonstrate the potential for full-scale production. This proof is crucial for securing further investment.
🌱 2 Contrasting Case Studies in Climate Tech
Each sector within climate tech, from energy to advanced materials, needs to be considered on a case-by-case basis to effectively position for funding.
It’s vital for founders to approach pitching with a perspective that resonates with investors.
Discussing Climate Tech involves a variety of products, each with different levels of commodity-like characteristics and values that depend heavily on timely delivery.
One interesting startup in this space is Dash Clean Energy. This entrepreneurial venture emerged from Greentown Labs in the Northeast US. The founder utilized mostly off-the-shelf components to innovate in clean hydrogen production from renewable sources. At its inception, Dash Clean Energy might have been at a TRL 7, which is relatively high, indicating the startup was nearing market readiness when seeking pre-seed funding. However, this startup's approach suggests it may only need a couple of funding rounds before moving away from venture capital reliance, illustrating a path where early high readiness can lead to quicker independence from external funding.
Contrast this with Antora Energy, which underwent a more complex development process to determine the optimal storage media ratio for long-term energy storage, possibly involving thermal storage technologies. This startup was supported early on with over $5 million in grants from the state of California, a significant boost before any substantial equity funding was sought. Enter Energy was at a TRL 3 when they decided to skip the pre-seed round entirely because it wasn't sensible given their stage of development—lacking a supportive customer base at that time. By the time they engaged a customer and started pilot projects, they were prepared to begin raising a seed round directly, skipping earlier stages typical for startups with less development.
These examples highlight the diverse pathways within the climate tech sector, illustrating how different approaches to product development and funding can influence a startup’s journey through the venture capital landscape.
🤝 How to Target the Right Investors for Your Early-Stage Deep Tech Startup
For an aspiring founder, focusing time and effort on choosing the right investor is crucial, as this decision can significantly influence the trajectory of your startup. Here are five key points to consider:
Geographic Focus: Determine if the investor has a preference or specialization in certain geographic areas. This can be vital, especially if your innovation has regional applications or if local regulations and market conditions are factors.
Sector Focus: An investor’s focus on specific sectors can enhance their ability to support your startup. Those with extensive investments in a particular field are likely to have better networks, more significant insights, and a deeper understanding of the market dynamics in that sector.
Funding Stage Focus: Some investors specialize in early-stage startups, while others prefer to come in once a company has gained more traction and stability. Investigate which stages of funding the investor typically engages with, such as pre-seed, seed, Series A, or later rounds.
Value Addition Beyond Capital: Assess the alignment between the investor’s capabilities and your startup’s needs. What have they historically provided to other startups, and what can they realistically offer you? This includes not only funding but also guidance, connections, and strategic advice.
Investor Portfolio and Engagement: Look at the number of companies within a VC's portfolio. This can indicate whether they tend to be hands-on or hands-off. For instance, a VC firm with numerous ongoing investments and only a few partners may not be able to provide detailed guidance to each venture.
When considering investors, it's also helpful to communicate with other founders who have worked with them. This can provide insights into how supportive and involved the investors are in practice. The real synergy comes from a combination of financial investment, strategic guidance, and network opportunities that align with your startup’s needs and growth stages.
🎯 Founder-Market Fit and Market Validation: Highlighting Strengths in Pre-seed Fundraising
Every investor is different, especially at the pre-seed stage. At this stage, we all have different investment theses, even if we’re all aiming to invest in the improvement of climate.
Founder-Market Fit
Generally, we look for certain key elements, such as founder-market fit, since product-market fit is typically not established yet at the pre-seed level.
Founder-market fit refers to how well the founders align with the market they’re entering. For example:
How long have the founders worked together if it’s a team?
Is this addressing a genuine problem, or is it just a "nice to have"?
How large is the market opportunity?
These are common surface-level questions that are easily found online and don’t necessarily add extra value—they’re quite commoditized and widely known.
What’s really important is to put your strongest point forward, and this is often overlooked. If I were part of a well-known company and raising funds, I’d put that on the first slide.
For example, if the founder had 15 years of experience at a major company, like Tesla, that should be front and center because it speaks volumes. Or, if I were a founder with high customer demand but couldn’t meet it due to growth constraints, that would be the key point I’d highlight—because it shows the potential of your idea.
At the pre-seed stage, VCs look for a variety of signals that indicate founder-market fit. It’s not just about how many years someone has spent in the industry or how deeply they understand a specific subject. What really matters is how aware they are of themselves, their strengths and weaknesses, and how well they understand the challenges of the industry they’re entering.
To put it simply, putting your best foot forward means demonstrating your awareness of the entire picture—yourself, your product, and the industry—and presenting that with the utmost care.
“Look at your strengths, focus on them, and then try to double down on them.”
Market Validation
In the venture capital world, particularly at the pre-seed stage, market validation is a crucial aspect that investors scrutinize closely. Different forms of validation carry varying weights depending on the context and the industry.
For instance, having a world-class expert involved can make a huge difference. When someone of that caliber is dedicating their time and expertise in the early stages, it's hard to ignore. However, as a general rule, most advisory slides don't get much attention.
What many VCs focus on instead is the actual market traction—how much effort and resources potential customers are dedicating to working with you. This can show up in various ways.
“What I look for in signal in terms of that actual market pull is the amount of resources somebody has dedicated to working with you. And that can come in many forms, right? At a pre-seed stage, it can be small customers trying to knock you down to give you orders that you can't fill. It can be large customers putting together land, water, and power resources to actually try to work together […] the amount of resources they're dedicating to working with you and how you can show your work in showing the amount of resources that they put together just to talk to you, to think about working with you, to put in concrete steps to that, that says a lot to a pre-seed investor like me.”
