What deep-tech startups today are doing right, and what they can learn from their predecessors.
Lessons from the previous generations of trailblazing tech companies
It’s a fantastic time to be a deep technology investor. Almost a dozen deep tech companies presented at YCombinator’s W16 demo day; ranging from farming robots to ultrasound diagnostics to space communications to orbital launch vehicles to supersonic aircraft. Having spent a decade investing in hard tech at Lux, I am proud to see so many startups going after solving hard technical problems to solve serious global problems while scratching billion-dollar itches.
Startups are more fertile grounds for discovery than ever. Sophisticated computer-aided design tools are more accessible, as are services for making machined and 3D printed parts, populated circuit boards, and mass manufacturing — resources that previously prevented most startups from getting launched in the first place. Prototyping tools such as Electric Imp and Particle.io can help developers build smart, smartphone-compatible connected devices for consumers and commercial customers.
What is this new breed of deep-technology startup doing differently? What additional lessons can this new breed of entrepreneurs take away from the hard lessons learned by the biofuel, battery, semiconductor, and energy-harvesting startups of the last decade?
Emphasizing product over technology:
In my early days in venture, deep tech entrepreneurs struggled to communicate how their technology would directly impact user experiences. Emphasis was on figures of merit, such as efficiency and speed, and the rest was up to our imagination. Semiconductor companies raised hundreds of millions expecting to displace incumbents in phones and laptops, and were sold for amounts proportional to the number of PhDs on staff. Energy companies raised much more expecting to sell commodity products that produce commodity electricity, fuels, and chemicals at a fraction of the cost of conventional methods. At the time, a 2x lower-power radio, or 2x energy-dense battery, or 50% more efficient solar sell made intuitive sense, but as hitting those goals took longer and cost more money in the face of Asian competition (semiconductors) and dropping energy prices (clean tech), these companies found it difficult to find the follow-on capital they needed to realize the advertised benefits at scale. Today’s deep tech companies spare no effort to communicate the product experience. Brilliant videos and animations communicating user experience (more on that later), with lessons drawn from peers doing SaaS and on-demand services. The amount of focus placed on communicating value to customers and end users mirrors their emphasis of delivering value over pushing the technology envelope.
Building lasting companies:
Today’s tech companies are building up the talent they need for the long term. Not only are they hiring engineers, but they are also infusing DNA from design, product, and marketing. The entrepreneurs go at lengths to clearly communicate their view of how their company shapes the future; rather than leaving it up to employees and investors to use their own imaginations. As a result, these companies attract a wide range of passionate employees that work vociferously toward that shared vision. Founders build the companies with a clearer view of the skill sets needed to carry the company all the way, as opposed to proving out the technology and expecting investors to double down or acquirers to start putting in pre-emptive offers.
Putting customers first and quickly Iterating quickly on product:
The semiconductor and energy companies of yore suffered from long technology development cycles and difficulty adapting to changing market conditions. When you’re building a pilot facility, or investing $10M on a full mask set, little can be changed to adjust for product-market fit. Today’s companies are managing these problems by finding ways to get to market faster, and iterate without penalizing their early investors by having to raise massive amounts of money to reposition themselves in the market.
But where should they spend more time?
Think about competitive advantage:
The glamour of delivering shiny objects among the armies of SaaS, app, and data companies dazzles entrepreneurs and their early investors. Unfortunately, many startups don’t appreciate that barriers to entry will continue to drop as basic tools and technology proliferates. In most cases, products will be obsolete as soon as they hit the market. Many smart entrepreneurs attempt to overcome this by emphasizing brand and user experience. Unfortunately the root of what makes many of these cameras, monitors, speakers, and health trackers easy to use also lowers switchover costs.
I would love to hear startups convince me of a unique experience they are bringing to bear, with the hardware/tech simply acting as a facilitator that could even be transparent to the user. In fact, ideally, you would want to user to be unaware of there being any technology at work at all. Apple has mastered the art of abstracting technology behind a rich experience that makes its products so simple yet attractive.
(enthralling experience) “dot” (unique tech) = competitive advantage
I want to experience something magical, and ideally, be ignorant of any gadgets or technology working in the background. When users are accustomed to a rich experience, they are unlikely to be drawn away by the next shiny object that comes along. When I look at companies, I want to be as enthralled by the experience as I am impressed by the technology. Why the dot product? For those who were awake during high school calculus, it’s the inner product of two vectors, which is small/zero if orthogonal, and greatest when they are codirectional. Translation? You’re most advantaged when your technology is focused along a rich user experience.
Make sure your deep tech delivers a 10x advantage, or you’ll always be gasping behind the curve:
Having been on the boards of many fabless semiconductor companies, I learned, the hard way, thet a disproportionate amount of time and money goes into building and marketing products vs. reducing technology to practice. Many investors — myself included- and entrepreneurs fell into the trap of expecting smooth-sailing from seeing successful experiments on the bench. Operational expenditures for R&D will quickly be dwarfed by marketing and customer support — so the question is less about whether the technology is better, but by what margin, because as a startup, though technology can be iterated faster, it’s the giants that are more efficient at doing the heavy lifting on production, sales, and marketing. Many startups found themselves in the trap of having to raise financings for that “next generation” chip or “enhanced” LED manufacturing process that put them in constant fundraising mode further diluting employees and prior investors.
Having grown up as a Trekkie, gearhead, and amateur programmer, I feel excited and fortunate to be investing at this special time when entrepreneurs and investors are focusing on deep technology.
Shahin Farshchi, Ph.D. is a Partner at Lux where he invests in space, robotics, and hardware companies. You can follow him on Twitter at @Farshchi.
