Deep tech founders need patient venture

During a recent meeting with a deep tech founder in Manchester, I found myself sharing a bunch of learnings from my time at ARM, some of which I probably take for granted.

This is the investment criteria we use at ADV to evaluate a deep tech opportunity: “You’re innovating with fundamental building blocks in the technology stack. You may be advancing the technological frontier in hardware or software and are likely to be recognised by peers in the industry as leaders. You will have developed an elementary understanding of the value that your technology brings to the society and the world. Great UK examples include Autonomy, ARM and Deep Mind.”

Re-defining an industry doesn’t happen overnight. In fact, depending on what stage a team and their technology is at, it could take well over a decade to reach full potential and so the founding team need energy and resolve. Many of the deep tech businesses I have led, partnered with, invested in or acquired, took well over 10 years to reach their full commercial potential. And expect that journey to be turbulent and unpredictable at times too! That’s the nature of industry-defining deep tech, unpredictable outcomes.

Clearly the time horizon to reach product market fit could be much shorter, but commercial success usually takes time! Usually because industry is often slow to adopt at scale, or not prepared to bet on small unproven startups. But the point is that founders and investors have to be prepared to go on the whole journey – or there is little point in starting it. Imagine 15 years of late nights, millions of air miles travelled (because what you do is global from the get go) and constant hunger to innovate, keeping your customers with you and on your roadmap.

Oh and don’t forget to have up your sleeve a cunning plan to outsmart the competition, assume you have no money and less people! The culture of “no money, no people” was core to ARM for decades, and may explain its exceptional product margins.

Planning for five or more funding rounds is probably sensible. Which means your investors need to be patient and have capital to follow on. The cap (capitalisation) table needs to reflect this from the beginning. It must balance several needs: the founders and co-founders throughout their journey; smart people that join along the way; and future investors (who will have returns targets).

Above all the cap table needs to provide capacity now and into the future. Selling large parts of the future today could be foolish and render the company uninvestable in the long term. Choose wisely. At each round you’ll relinquish significant portions of your equity (c. 20%) as others decide to join you on the journey. A good analogy is giving away slices of a pie, depicted below.

It’s important at the earliest stage that you have the support of angels or advisors who understand the market you’re targeting and have been on a comparable journey. We’re in a digital world and advisors don’t need to be on your doorstep – so who are the global leaders in your space?

Re-engineering a company’s cap table is much more painful after multiple investment rounds. With patient venture support from the beginning, you’ll give yourself the best possible opportunity to scale big.

Often deep tech can be conceived in academia, sometimes a world far far away from venture investment and all that it brings to (or takes from) a company. We’ve seen many examples of PhD supervisors – who are no longer active in the day to day operational development of the company – owning more equity than the founder! Why so?

This leaves no room for angels, future employees and institutional investors. In my time at ARM, we worked with global leaders and disruptors across the full stack of semiconductors and software. Every single business – on its journey to build generation-defining technology – had to learn this lesson. Raising money isn’t a game a of chance; the best founders know what types of investors they want on their journey.  

So given we’ve established that you’ll probably need to set aside the next 10-15 years of your life to scale big in deep tech, a focus on attracting the right people at the right time may act as an accelerant. It’s your job to find those people, draw them in and make your journey theirs too!

ADV back ambitious, generation-defining, digital technology entrepreneurs. To date, we’ve made a number of deep tech investments – Altitude Angel, B-secur, Birdi, Mindtrace and Phoelex – and we’re always looking for more founders to back.

Patient venture is about investing throughout the journey. If you want to redefine an industry then why not drop us a line.

ADV also invests in digital platforms and sales driven companies. Check out how we define them here.

We operate a platform based approach to investment, there is no need for warm introductions. Register on our platform and three members of our team will review and feedback.

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