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How to Evaluate Deep Tech Startups

How to Evaluate Deep Tech Startups
By Andy Gordon
Date June 23, 2021

When you’re vetting tech startups, it’s not enough to simply note their sectors. Identifying a startup’s sector is merely the first step. 

You need to ask yourself what kind of tech has you intrigued. 

Is it a frontier technology company? Frontier technology has been described as the intersection where radical forward thinking and real-world implementation meet. And yes, that’s open to wide interpretation. My take is that these technologies are on the cusp of significant adoption and user impact. 

Examples would be gene therapy, robotics and 3D printing. All have seen some level of commercialization, adoption and user impact, but there’s much more to come in the near future. The wait is almost over.

Then there’s moonshot technology. These technologies are experimental in nature. They are ultra-ambitious but come with huge risks that are not fully understood. You have no idea if they’ll work, but if they do, the impact will be enormous. 

Internet balloons and driverless cars both began as moonshot ideas. One will have a huge impact on the world. The other didn’t work out. But even for driverless cars, profitability is still many years away. 

But don’t confuse moonshot tech with deep technology. Like moonshot tech, deep tech has the potential to transform and reinvent industries. But the experiment is much further along. Deep technologies are known to work. The risks are better understood but still require further exploration. 

While deep tech companies usually own or license patents, their products are not fully proven or validated — at least not by third parties.  

Deep tech companies can come from a variety of sectors. Some of the more common ones are advanced material science, photonics and electronics, power electronics, vision and speech algorithms and techniques, artificial intelligence, biotech and quantum computing.

Investing in Deep Tech

For startup investors, moonshot companies can be very exciting and financially rewarding. But they scare the heck out of me. There are so many unknowns that have to be set aside before you say, “let’s invest anyway, this could be huge.” 

I’ve invested in frontier tech companies that are commercializing robotics, 3D printing, drones and a few other technologies. But it’s deep tech startups that intrigue me the most these days. 

Investors need to be careful with deep tech. The technology risks are still significant. Investors must accept the fact that product development will be long and hard and require multiple iterations. A final product typically takes two-to-five years to complete. 

I presented a deep tech company to First Stage Investor members in April. (If you’re not already a First Stage Investor member, click here to sign up.) It has created an amazing material-enhancing nanotube that’s far superior to anything available on the market. But validating its dozens (if not hundreds) of uses will still take time. Serious revenue remains years away. 

Another deep tech company I’m looking at is The SMART Tire Company. It makes tires unlike any you’ve seen before. They never go flat and will last as long as the vehicle itself. But SMART Tire also has a long way to go before its technology is perfected, validated and made available for auto and truck manufacturers. In the meantime, it’s decided to make tires for scooters and bikes. 

Evaluating Deep Tech Startups

There are many questions that must be answered in order to determine whether a deep tech startup is worthy of an investment. 

  • How well does its technology work?
  • Can it be manufactured at a reasonable cost?
  • Can it be manufactured and marketed at scale?
  • Has the startup found a company (and big potential customer) to help with testing and feedback? 
  • Do the most lucrative applications for the technology align with the fastest product development? 

When a product requires a long runway to reach a market, time itself becomes a risk factor. Here are some forward-looking questions I use to assess time-related risks…

  • What other technologies could emerge in the next few years that might offer an appealing alternative? 
  • How might user trends change? 
  • Will the product be a nice-to-have or a must-have?
  • Will customers be willing to adopt technology that might be difficult to integrate?
  • Is the market moving closer to or further away from where the product is heading?
  • Will regulations become more or less restrictive (or easier or harder to comply with)?

Now that so many legacy tech companies are entering middle age and slowing down, investors are looking for new tech opportunities. The deep tech space offers huge upside potential. 

If you want to add deep tech to your startup portfolio, look for companies that have done the best job of removing the majority of technology risk while shortening (or circumventing) the long product development cycle.

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