Welcome back to Deep Tech Catalyst, the channel by The Scenarionist where science meets venture!
Today, we are thrilled to welcome Ryan Lewis, Partner at SRI Ventures!
Building a Deep Tech company is a broad topic, but let’s focus on the pitch deck and, more specifically, on how to effectively communicate the commercial potential of innovation in the early stages to potential corporate partners.
Here are the key themes covered:
🛠️ Product or Feature Dependency
💰 Cost of Acquiring Customers
🤝 Engagement Strategies with Customers
📈 Advantages of Multiple Customers for VCs
👥 Relationship Between Founders and Investors
🚀 Discussing Deep Tech Trends in the US
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KEY INSIGHTS FROM THE EPISODE
How to Establish Initial Customer Relationships in Deep Tech Startups?
One aspect I’ve really enjoyed about listening to your show is the attention this topic receives.
From my perspective, I’d like to add two elements for consideration.
First, product and feature dependency.
Second, a commonly used aspect in Deep Tech — the cost of acquiring customers.
🤖 Product or Feature Dependency
Starting with product or feature dependency, especially in the Deep Tech category, which encompasses a range from hardware to software, it's common in a pitch deck to focus on what’s technically unique or the breakthrough innovation.
However, founders often struggle with demonstrating how this innovation translates into a real-world application for customers. In simpler terms, how a customer might use this breakthrough. This sector is exciting yet challenging because these technologies are often dependent on other mechanisms, tools, or existing infrastructure.
This offers a chance to disrupt what a customer is currently working on, but it also requires entrepreneurs to be very aware of the environment they are selling into. Understanding how a consumer or a customer might engage with the product, even in a pilot phase, is crucial.
At a high level, you want multiple avenues for success, even as an early-stage company. If there’s only one path, and it requires the customer to have significant infrastructure already in place, it's not inherently bad, but it is limiting.
🤑 Cost of Acquiring Customers
It’s essential to understand the total cost of change or adoption for potential customers. This is particularly vital in Deep Tech, where you’re not merely replacing one software license with another. You must be aware of all the changes necessary for a new technology to be fully adopted.
This is a vital strategy to cultivate early on.
Identifying multiple paths to success ensures that a company isn't solely dependent on one avenue, which can mitigate risks and broaden the appeal to potential investors and partners.
This approach is particularly crucial for startups in the deep tech sector, where market entry barriers are often high, and the technology's application can be broad and varied.
Letter of Intent (LOI)
Obtaining a letter of intent from potential customers is integral in validating the market need and the technology's potential impact.
The first step is ensuring that your technology or product aligns well with a specific customer's needs. Engaging in deep discussions with potential design partners or early adopters can help refine the technology to meet real-world requirements.
A common mistake that scientific founders often make is not engaging enough with the market early in the development process.
Spending too much time perfecting the technology in the lab without adequate customer feedback can lead to a product that doesn't meet market needs or is too niche to be commercially viable.
🤝🏻 Design Partners
The point here is not just about proving the technology is compelling but also about exploring potential consumption models.
There’s not a definitive answer from the start—since that's often impossible—but about framing a range of potential ways to introduce the product to customers.
For example, consider a new material intended for an industrial process, such as eco-friendly packaging that provides insulation. Companies focusing on this haven't just considered the material's technical requirements but have also planned which products to launch first, the scale of production, and which plants might use this material. Navigating these early questions with partners can be frustrating, as it often turns into a search for product-market fit.
However, this process is crucial for understanding the true potential value of the business, especially when preparing to raise later-stage funding rounds.
Engaging Customers
The process requires considerable introspection, which is why discussions like this are invaluable.
To start, one of the best practices is to identify multiple paths to success for a company, which is a strategy we emphasize heavily. It helps mitigate risks and enhances appeal to potential investors and partners.
In the early stages of a company, whether we're spinning it out or involved from the beginning, it's crucial to explore multiple engagement strategies with customers.
This approach can vary depending on the sector or the company but having diverse methods to build customer relationships is essential.
This is closely related to a common challenge we often encounter: many early pilot projects become 'all-or-nothing' scenarios.
While this isn't inherently negative, it does mean that a compelling technology, which might not be fully developed, requires significant effort and specific stakeholder engagement for any sort of pilot testing to proceed. This not only limits your sales focus but also restricts your business outreach to a very narrow audience.
A Case Study
For instance, let’s consider the aerospace and space sectors.
Many companies in this field aim to build a platform — something that either flies in space or in the air, equipped with sensors and potentially a software package. The typical approach might be to sell this platform and collaborate with others for testing.
However, there are alternative strategies.
Why not test the software that will operate on these platforms, or use proxy data or synthetic data to evaluate how well the system might perform in actual conditions?
These approaches might not generate the core revenue immediately, but they serve two critical purposes: building closer customer relationships and lowering the entry barriers for those customers.
This way, instead of customers telling you to return when the product is fully developed, they engage earlier in the process.
The goal is to find various entry points to systematically de-risk parts of the business.
This strategy helps avoid a common pitfall where you have great intellectual property and a solid idea but still require substantial funding just to reach a proof of concept.
This scenario can be particularly challenging for scientists or first-time founders.
🚀 Advantages of Multiple Customers for VCs
Focusing all efforts on a single customer after initial success, something that can be seemingly beneficial in the early stages for a company can significantly impact the growth trajectory and is a concern for investors.
The reason is that over-reliance on one customer can mask underlying issues with market fit and scalability, which are critical for long-term success.
From an investment standpoint, it's crucial to ensure that the company doesn't just tailor its development around the needs of one major customer. While this can provide short-term gains, it often blinds the product team and the founding team to broader market opportunities.
Over the years, as Deep Tech has matured, the ecosystem of investors, entrepreneurs, and incubators has grown more adept at navigating these challenges.
Today, more investors are conversant with the lifecycle of Deep Tech companies and understand the importance of developing additional partnerships to ensure the product can scale beyond a single sales path.
When the magic happens
The real challenge, and perhaps where the 'magic' happens, is knowing how and when to expand these partnerships.
It isn't something that can be easily prescribed; it often depends on the specific circumstances of each company.
Case Study #1
For example, in one scenario involving a software product, it was clear early on that we needed to engage multiple design partners across various business applications. This approach was essential even though the company had strong proof points in the financial services sector. The unique requirements of different customer segments meant we had to demonstrate versatility and adaptability quickly.
Case Study #2
In contrast, another company I worked with, which specialized in robotics, benefited from deep engagement with a limited number of design partners. The high demands of their systems meant that achieving significant performance improvements required extensive iteration and close collaboration.
Such experiences underscore the importance of having clear communication and shared understanding among the founding team and the board. This alignment is crucial, especially in the early stages.
🤜🤛 The Relationship Between Founders and Investors
The relationship between founders and investors is akin to a marriage. Transparency and clarity from the onset are vital to avoid misunderstandings in the future. Founders often focus primarily on securing capital and developing their initial product, but establishing a foundation of trust with investors is equally important for long-term success.
In this regard, it’s important not to rush to provide answers just to satisfy a perceived need for quick reporting. This is especially true in early-stage companies where the best approach is often iterative. It involves continuous communication with the board or investors, not just to report results but to collaboratively review and refine hypotheses based on customer feedback. This process should be a cycle of testing, feedback, and adjustment.
In these early stages, where the goal is often to fundamentally disrupt a market, there are no definitive answers. It’s about iteratively finding what works—this applies to technical development and business aspects like pricing strategies.
For example, one company can move beyond initial testing and find a good market fit, but now faces the challenge of pricing their product. They're experimenting with various pricing models across different customer segments to determine what works best.
Communication is the key
It's crucial, particularly in environments where frequent iteration is necessary. Changes and new ideas need to be efficiently communicated not just within the team but across the entire organization. While it might seem obvious, it’s worth noting that poor communication can lead to significant issues, potentially breaking a team or even a company.
Moreover, it's not just about whether projections were incorrect or results were unexpected, but more about the context in which these outcomes occurred.
Without proper documentation of assumptions and feedback, a business can seem like it's merely lurching from one decision to another without any clear direction. The goal isn't to hide failures but to systematically learn from each step and track this progress effectively.
📈 Discussing Deep Tech Trend in US
Deep Tech has become a prominent investment category due to several key factors.
First, there's a shift in market dynamics, with major tech players influencing the types of problems entrepreneurs choose to tackle, moving away from traditional software solutions to more complex challenges like advanced manufacturing and biotechnology.
Additionally, there's been a noticeable change in R&D investment, with corporations playing an increasingly significant role. This shift is complemented by advances in foundational technologies, which have made access to sophisticated research tools, enabling a broader range of innovations.
The funding landscape has also seen dramatic changes. The increase in venture capital funds and deal sizes over the years has facilitated greater capital distribution, which supports the scaling of Deep Tech ventures. As of 2024, the question arises whether this trend will continue.
The answer is nuanced.
On one hand, the demand for solutions to complex, pressing problems continues to grow, which suggests that the momentum for Deep Tech will not only persist but increase.
However, the investment climate is adapting. After a peak in investment around 2019, the market is recalibrating. This recalibration doesn't mean fewer opportunities but indicates a more mature, perhaps more discerning investment approach focusing not just on capital-intensive projects but also on sustainable revenue growth and market fit.
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