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Understanding the VC Game in Deep Tech Startups | Deep Tech Catalyst

A chat with Thomas Park Partner, Lead @ BDC Deep Tech Fund

Welcome back to Deep Tech Catalyst, where we unlock the formula for turning scientific discoveries into market-ready tech ventures.

In this episode, we'll dive into crafting investable ideas, differentiating vital solutions from optional ones, and the art of attracting venture capital with Thomas Park, partner and lead at BDC Deep Tech Fund.

Find out why scientists must transition their research into commercial entities to drive widespread innovation.

We'll explore key strategies for making a deep tech company investable, highlighting the importance of solving significant industry problems and the art of differentiating a 'must have' solution from a 'nice to have.'

Additionally, we'll discuss the critical role of team dynamics in attracting venture capital and the common pitfalls to avoid when pitching to investors.

Gain insights into the venture capital landscape, including the necessity for massive returns and what VCs offer beyond funding.

Tune in to equip yourself with the knowledge and strategies needed to navigate the complex but rewarding world of deep tech entrepreneurship.

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🎯 Building an Investable Deep Tech Startup Means Framing The Right Problem

Venture Capitalists (VCs) invest not just in the startup and its founders, but also in an industrial sector and its trajectory.

Solving a significant problem that enables an operation, task, or job that many people need to perform but is hindered by a limitation is crucial.

For example, server factories and the need for cloud computing. Servers address the growing need for an increasing number of connected devices without in-house servers. Similarly, successful Deep Tech solutions must enable a key task for a large number of customers.

Solving such critical problems creates a market large enough to interest the industry and VCs.

The founder's task is to pinpoint the problem and precisely target the solution toward customers facing it, making possible what would be impossible without the proposed solution.

🚀 3 Tips to Identify a 'nice-to-have' vs. a 'must-have' Solution

  1. First, scientists purely from an academic background should connect more with the industrial sector through collaborations and consulting to identify where the industry is focusing on solving significant problems. This understanding will help them grasp the scale and nature of the primary issues in their research area.

  2. Secondly, reading industry journals and reports provides reputable updates about market dynamics and where the industry is heading.

  3. Third, attending trade conferences provides networking opportunities and further insights into the scale of problems to be solved.

🌎 What is the Impact of Scientists Starting Deep Tech Companies Today?

Research and development are crucial, but it's also essential to develop a commercial entity around it.

Otherwise, discovering something new isn't enough to widely spread innovation to reach those in need.

It's about taking your research and giving it life in the commercial world.

This isn't just about making new discoveries; it's about turning those discoveries into something tangible that reaches and positively impacts the people who need them most.

It's a journey from the lab bench to the hands of users, bridging the crucial gap between innovation and real-world application.

🤝 Why do VCs invest only in strong teams?

Understanding the roles of individuals in tech is crucial. Being a CEO is a challenging role requiring a mix of skills, especially in creating the right narrative to sell the solution to early customers when the technology itself is a barrier.

Additionally, assembling a team by convincing top talents to join the venture is essential.

The CEO must identify and communicate an opportunity compelling enough to persuade highly skilled individuals to leave their jobs and take the leap.

⛔️ 3 Mistakes to Avoid When Approaching a VC

  1. Avoid the 'Cinderella syndrome.' For every investment, a VC typically analyzes about 300 companies. Time is a precious asset: use an investor's time wisely and get to the point.

  2. Focus on communicating why people should care about buying your solution, not just the problem but also the willingness to pay for the solution. This understanding helps investors see the potential for returns that meet their expectations.

  3. Scientific founders must be able to communicate how they will handle competition, considering the long development times of deep tech solutions and the aggressive nature of competition in some sectors.

📈 Understanding the VC Game: Why Do VCs Need Massive Returns?

VCs are as invested in the game as startup founders, and this concept is critical when forming a partnership with an investment fund.

To understand venture capital financing, consider three key elements:

  1. VCs are governed by a power law: Typically, out of 10 investments, eight may fail, one might return the invested capital, and one 'fund maker' might yield massive returns covering previous losses and generating significant profits.

  2. VC is a challenging business: Historically, only the top 10% of funds capture two-thirds of the industry's returns. This means that 90% of VC funds don't make enough money to pay back their investors.

  3. Sustained advantage: Once a fund is successful, top founders come to it, attracting more investors and capital, creating a virtuous cycle. This factor is crucial in the venture capital sector to foster a fund's success.

🧗‍♀️ Beyond Funding: The Added Value of VCs.

It's crucial to understand that venture capitalists can offer more than just money to founders. Here are 3 things to consider:

  • The first thing to realize is that, unlike a bank, a venture capital firm is a full partner and co-owner of your business.

  • As such, they tend to introduce key influential figures to open new markets in the relevant industrial sector to the founders and support them from an emotional and psychological standpoint, which is very important for a CEO.

  • Lastly, it's important to be aware that the relationship between a scientific founder and a venture capitalist is akin to a marriage: it's long-term and close-knit.

Therefore, when entering into this kind of agreement, one must be conscious of the nature of the relationship between the two parties, especially when navigating through challenging times along the way.

This is all for today! 👋

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Please be aware: this is not investment advice! The information provided in this publication is for educational purposes only and should not be construed as financial advice or a solicitation to buy or sell any assets or to make any financial decisions. Furthermore, we want to emphasize that the views and perspectives expressed by guests on The Scenarionist do not necessarily reflect the opinions or positions of our platform. Each guest contributes their unique viewpoint, and these opinions are solely their own. We remain committed to providing an inclusive and diverse environment for discussion, encouraging a variety of opinions and ideas.