Welcome to the 35th episode of Deep Tech Catalyst, the channel by
where science meets venture!Today, I'm excited to host Anil Achyuta, Managing Director at TDK Ventures!
In our discussion, we explored not only what makes a team successful in the eyes of an investor and how it is evaluated during due diligence, but also provided practical advice on building a team, attracting key resources, and leveraging strategic industry connections.
Key Themes Covered:
📊 Defining the Investable Deep Tech Startup Team
🎛️ The Crucial Role of Team Dynamics in Venture Capital Due Diligence
🧩 Complementary Founding Teams: An Asset for Startup Success
🧲 5 Strategies to Attract the Best Talent with Limited Resources
🤝 How to Leverage the Strategic Value of Industry Connections
🎧 Prefer to Listen?
KEY INSIGHTS FROM THE EPISODE
📊 Defining the Investable Deep Tech Startup Team
For Deep Tech founders, understanding the composition and responsibilities of a core team is critical, as well as understanding why this is important from an investor's standpoint.
The team typically includes the CEO, Chief Technology Officer (CTO), and eventually, the Chief Commercial Officer (CCO), who become pivotal as the company matures.
The CEO (Chief Executive Officer)
The CEO's role is fundamentally about ensuring the operational continuity of the company, which includes maintaining financial health and recruiting top-tier talent. The primary responsibility is to secure sufficient funding to avoid financial pitfalls and to assemble a team that is superior in capability, thereby fostering an environment of growth and innovation.
“From the CEO's perspective, it's a very simple job. You have to keep the lights on and recruit people who are smarter than you. That's it. There is no other job for the CEO. Make sure that you have enough money so that you don't run out of it.”
The CTO (Chief Technology Officer)
The CTO, often a founder from an academic or industrial background, is tasked with shaping the technological vision and distinguishing between the technology itself and the products derived from it.
This distinction is crucial as not all superior technologies translate into successful products.
The CTO must navigate this landscape, ensuring that the technology developed not only meets current standards but also sets the stage for future advancements.
A successful CTO is characterized by the ability to think non-linearly, embracing unconventional strategies that propel the company beyond typical industry trajectories. This approach involves envisioning far-reaching solutions that dramatically outperform existing technologies rather than making incremental improvements.
The CCO (Chief Commercial Officer)
The role of the Chief Commercial Officer (CCO) is crucial in determining a startup's market strategy, especially in specialized industries.
The CCO is responsible for guiding the company's product from conception to market, requiring a deep understanding of the industry's landscape, customer pain points, and market dynamics.
Ideally, a CCO would have experience with established players in the relevant sector—such as Boeing or Bell Helicopters for an aerospace startup focused on electric vertical takeoff and landing aircraft.
This background enables them to leverage proven go-to-market strategies and customer insights.
Alternatively, there is value in appointing a CCO from a startup that has navigated complex product development and market entry scenarios, such as SpaceX, particularly in sectors targeting government or military contracts.
This experience underscores the importance of having at least one robust go-to-market execution in the CCO’s history, as it is deemed critical for a startup’s success in navigating the complexities of commercialization.
🎛️ The Crucial Role of Team Dynamics in Venture Capital Due Diligence
In the context of venture capital investment, the dynamics between the CEO, CTO, and CCO within a startup's core team are critically evaluated. Investors prioritize teams that exhibit resilience and a proven capacity to navigate challenges.
These experiences are indicative of a team's ability to persevere through market adversities, an essential quality for startups aiming for significant growth.
Investors look for teams that function cohesively, much like an all-star sports team or a well-coordinated jazz band. In such teams, members understand each other’s strengths and weaknesses and know precisely how to synchronize their efforts—when to take initiative, when to support, and when to innovate.
This deep mutual understanding and the ability to strategically complement each other's skills are critical for navigating the startup’s growth phases effectively.
Thus, during the due diligence process, investors assess whether the core team demonstrates this level of synergy and resilience, as these qualities are often predictors of the startup's ability to achieve long-term success.
This ideal relationship among the core team members is crucial because it significantly enhances the startup's capability to withstand challenges and seize opportunities in the competitive landscape of their respective industries.
How Do VCs Assess Team Dynamics?
Effective due diligence processes for assessing the dynamics within a startup’s core team, particularly between the CEO and CTO, involve several practical methods to gauge the health of their working relationship and their alignment with the company's vision.
One approach involves observing interactions during meetings. For instance, if a question directed at the CTO results in the CEO interrupting or overriding the response, it may indicate a lack of trust or respect between them, which is a red flag for potential investors. This behavior can suggest issues with internal communication and decision-making processes that could jeopardize the startup's stability.
Another method is the application of scenarios where the CEO and CTO are asked the same questions separately. This technique helps reveal inconsistencies in their understanding of the company’s direction and priorities. If their responses show significant discrepancies, especially about the core vision or ongoing projects, it may signal a misalignment that could impede the startup's strategic execution.
Reviewing board minutes offers additional insights into the startup's internal priorities and the accuracy of the information presented to investors. Discrepancies between the emphases in pitch presentations and discussions documented in board meetings can reveal gaps between stated goals and actual focus areas, such as a mismatch between a claimed focus on sales and a real emphasis on intellectual property concerns.
🧩 Complementary Founding Teams: An Asset for Startup Success
When evaluating the backgrounds and experiences suitable for executive roles within a startup, particularly those of the CEO and CTO, investors often have specific preferences based on the unique challenges of early-stage companies.
Investors place immense importance on the compatibility and collective resilience of the founding team, often valuing these attributes over many other factors in their investment decisions. Here are 4 key takeaways about it.
A preferred scenario for many investors is to have a CTO with a background in industry or academia, where they have likely gained substantial technical expertise and an understanding of the practical applications of their innovations.
Ideally, the CEO has prior startup experience, as managing a startup involves navigating high-stakes environments with significant risk of failure. Those with startup experience are better equipped to handle the fluid and precarious situations that arise and are perceived as more capable of scaling operations effectively, especially in the critical early phases.
As the company matures and progresses to later funding stages (such as Series C and D), the need for executive experience might shift towards industry veterans who can bring large-scale management skills, risk management expertise, and the ability to secure substantial funding.
The role of a Chief Commercial Officer (CCO), especially one with industry or startup experience, becomes crucial when complementing academic founders who may lack the necessary commercial acumen. This balance ensures that the technical vision is effectively translated into market-ready solutions, thereby enhancing the startup's chances for success.
🧲 5 Strategies to Attract the Best Talent with Limited Resources
In the early stages of a startup, attracting top talent is a significant challenge, especially when financial resources are limited. CEOs must leverage non-monetary strategies to entice skilled individuals to join their ventures.
Here are several effective approaches for recruiting without relying heavily on salary:
Credibility and Network: Having founders with a strong track record and extensive industry connections can be a huge advantage. For instance, a CEO with prior experience at a top-tier company, who has significant experience in building real factories, can leverage their professional relationships and past achievements to effectively recruit top talent.
Early Customer Traction: Demonstrating early interest from potential customers can be very appealing to prospective employees. If a startup can show that credible customers are interested in its product—even at the prototype stage—it validates the business and its market potential. This kind of validation can be a powerful lure for top talent who see the opportunity to be part of a promising venture with real market demand.
Evidence of Concept and Real-World Application: For startups originating from academic or scientific research, having robust evidence that supports the effectiveness of their technology or product—such as peer-reviewed publications or results from initial trials—can attract talent who are motivated by the opportunity to work on groundbreaking and validated technologies. For example, evidence from a significant study published in a reputable journal or data from preliminary tests can serve as strong endorsements of the startup's potential.
Theory of Game and Strategic Depth: Citing Reid Hoffman, the value of a business plan that incorporates backup plans for backup plans cannot be overstated. Such a comprehensive approach not only prepares a startup to navigate potential challenges but also serves as a potent tool for convincing highly knowledgeable industry professionals of the venture's validity and potential. Persuading an industry leader to join a startup from a top company highlights the startup's compelling vision and strategic depth. This move signals potential to insiders and investors, providing substantial credibility.
Proprietary Knowledge and Ecosystem Access: Lastly, having unique insights into customer pain points or exclusive access to a vital ecosystem can also be a significant draw for potential recruits. This proprietary knowledge or access ensures that the startup is not only aligned with current industry needs but is also positioned to effectively leverage emerging opportunities, making it an attractive option for top talent looking for influential roles in innovative projects.
🤝 How to Leverage the Strategic Value of Industry Connections
Understanding specific market demands is crucial for startups, especially in sectors like Deep Tech where the product-market fit and scaling are complex. Here's how deep integration into an industry ecosystem and strategic partnerships can significantly benefit a startup, illustrated with the example of building a hydrogen plant:
Strategic Industry Connections: Suppose a startup is establishing a hydrogen production facility with the capacity to match the demands of major steel producers, aiming for an output of about 100 tons per day. Having a founder or a team member who previously held a key position at a major steel producer, or who has developed strong partnerships within this industry, provides a unique competitive edge. This insider knowledge and these established relationships are nearly impossible for competitors to replicate quickly.
Understanding and Leveraging Pain Points: By being deeply ingrained in the steel industry, the startup team can accurately identify and address the specific needs and pain points of the industry. For instance, if the traditional industry struggles with certain inefficiencies that the startup's technology can solve, this positions the startup as a vital solution provider within the ecosystem.
Securing Strategic Partnerships and Offtakes: With established relationships, a startup can secure offtake agreements, which are commitments from businesses within the industry to purchase the startup's output once operational. These agreements significantly reduce market entry risks and provide a clear path to revenue, which is particularly appealing to investors.
Reducing the "Miracle" Requirement: In Deep Tech, bringing a product from concept to market often seems like achieving a series of "miracles." However, by securing a strong industry connection and focusing on a singular significant problem like carbon reduction in steel production, the startup can streamline its challenges. This focus decreases the number of hurdles that must be overcome, thereby reducing the perceived risk and making the venture more attractive to potential investors and partners.
Crafting Compelling Investment Propositions: Even without substantial initial capital, startups can attract investment by demonstrating strong industry relationships and potential for significant impact. For instance, a startup might not have the funds to fully develop its technology independently, but by showcasing a strong partnership with an industry leader and a clear path to solving a critical problem, it can successfully raise the necessary funds.
If You Don't Have Industry Connections, Build Them.
For aspiring founders, especially those transitioning from academia to entrepreneurship, leveraging a network from day one is crucial. The key to de-risking a startup in its initial stages lies in understanding and addressing unmet needs within the B2B value chain, which often hinges on having the right connections and insights into the industry. Here are 2 tips to fix this issue.
Networking and Relationship Building: The primary strategy for an academic founder with a potentially transformative technology is to establish or access networks with individuals who have deep industry connections. For example, if an academic founder has developed a new catalyst or technology for methane splitting, the next step isn't just refining the technology but also connecting with people who have the necessary industry insights and relationships. These connections can provide critical market access and help validate the technology against real-world applications and needs.
Team Composition and Strategic Hiring: Building a team with members who possess strong industry networks is not merely advantageous; it’s often essential. These team members can navigate and bridge the gap between innovative academic research and market demands, facilitating early-stage validations and partnerships that might otherwise be inaccessible.
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