Fundraising: Frontier tech or Frontier finance?
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Frontier tech startups — those built on innovations in biotechnologies, robotics, quantum computing, or advanced materials—are central to solving some of our most complex societal and environmental challenges.
Despite their game-changing potential, fundraising for frontier tech entrepreneurs is still incredibly challenging. There is a logic to that. Investors naturally gravitate to sectors where the cost of experimentation is low, independent of the sectors with the greatest need for innovation, or even where the supply of innovative ideas is the greatest. The fundamental uncertainty of frontier tech at its earliest stages hints at the financiers’ struggle to balance potential with the complexity of execution.
Despite this uncertainty, more VC funding than ever has been allocated to frontier tech over the last five years. Yet in 2022, according to Crunchbase and Pitchbook, these numbers represent only a fraction of the total: 12%. Excluding AI, drones, and robotics, we are down to 2% for all other frontier tech sub-segments, including advanced materials. This mismatch echoes the tangible impact of frontier tech. In a recently released PwC report, climate tech, an overlapping applicative segment, has seen low-impact sectors in terms of GHG emissions gain much higher funding than high-impact sectors like the built environment, agricultural tech, or energy.
There is a reason for that. At its core, the modern venture capital funding model requires investing in a specific type of startup, i.e., those poised for hyper-growth, aiming at $100+M revenue targets, and built for acquisition (note: it has not always been the case). If a startup does not fit the model — and most early-stage startups don’t — founders can either change their business plan to fit the mold or find a source of funding that better fits the business. That’s alright. While VC money can be rocket fuel for a startup, it’s not for everyone. VC funding is the most expensive source of capital: equity is traded for cash. And at later stages when the business is significantly re-risked, that math does not always add up in the founders’ favor. This is especially true with capital-intensive frontier tech companies, for which hardware, infrastructure, heavy industry, and manufacturing upfront capital investments are generally required.
Therefore, looking outside venture capital and toward the full stack of frontier tech financing options is critical for science entrepreneurs, both at early and growth stages. There are different kinds of capital for different kinds of startups and the kind of capital founders end up choosing will likely inform the business strategy — if not entirely direct how the business is run. The cost of capital will ultimately determine the ability of a company to scale, and in frontier tech specifically, capital tends to have an outsized influence earlier in the journey through growth. The capital brought on board should either be (A) cheap and/or (B) value add — most of the founders’ challenge is to figure out whether (A) or (B) are true across stages, structures, and multiple possible strategic paths.
When science entrepreneurs start working on an idea but need more clarity about the product, the commercial strategy, or the market, financing can take time and effort. Often, innovative technologies without a clear path to revenue languish due to a lack of initial funding to prove a concept. Non-dilutive, project-based — i.e., venture debt, commercial debt, project finance — funding is typically unavailable at very early stages due to a lack of track record. It is also limited in scale and often restrictive in scope. Dilutive funding at this stage tends to be more open-ended, but at a much higher cost if the idea proves viable.
The financing options available at early-stage can be boiled down to:
1. Philanthropic foundations, private grants, and prizes (non-dilutive): project-based grants or competitions offering prizes to focus research on a specific area: typically tied to pilots or milestones. This can range from no-strings-attached cash to co-branding (e.g., Omydiar Network, Gates Foundation, ClimateWorks Foundation, Minderoo Foundation, etc.).
2. Government grants (non-dilutive): public capital to support specific technologies and research activities. An empty caveat around government funding is that the cycles can be long and the certainty expected of a proposal doesn’t always translate into the uncertainty founders have to cross to product-market-fit. Grants also tend to come with excessive reporting requirements after the grant is landed (e.g., in Singapore, Enterprise Singapore, NRF, SGInnovate, etc.).
3. Crowdfunding (mostly non-dilutive): product-focused and outreach-based financing or capital raise hosted on a technology platform that enables access to a larger pool of potential backers who do not need to be accredited investors (e.g., Kickstarter, Fundable, Crowdfunder, etc.).
4. Angel investors/syndicates (dilutive): high-net-worth individuals and founders often pooling together into SPVs (group one-off deals) which are typically very network-based, low on diligence, and thesis/category driven (e.g., Green Angel Syndicate, Cambridge Angels, etc.).
5. Accelerators (mostly dilutive): programs offering funding and resources such as strategic partnerships, advisors, and workshops to help founders build and iterate on their thesis. Programs run the gamut from generalist accelerators like YC to frontier tech ones (eg. Carbon13, Breakthrough Energy Fellows Program, Creative Destruction Lab, etc.).
6. Catalytic capital (dilutive): funds bringing investment rigor and process to deals with a bias toward frontier tech potential over financial returns (e.g., Breakthrough Energy Ventures, OGCI Climate Investments, etc.).
7. Rolling funds (dilutive): investment vehicles structured like venture funds (LPs front capital so GPs can do multiple blind deals) but raised on a rolling quarterly basis, minimizing the hurdle to fund launch. Typically thematically or community-focused, with similar terms to VC deals albeit mostly following and unpriced (e.g., SAFE notes)(e.g., Climate Capital, Prithvi Ventures, Footprint Coalition Ventures, etc.).
8. Micro-VCs (dilutive): a handful of micro-VCs (venture funds that are < $15–20M) increasingly specialize in niche areas and embrace frontier tech at the pre-seed stage. These specialized capital pools can be tremendously helpful to their portfolio companies in ways that strict financial backers can’t. Specialization helps micro-VCs get into competitive deals thanks to their expertise instead of their check size, and the provided support drives science founders to find their product-market fit faster (e.g., Creative Ventures, Embark Ventures, Streamlined Ventures, etc.).
At AM2, we see that most science founders naturally focus on (1) and (2) over the first 12 to 24 months, and progressively embrace (4) and (5) pushed by their larger community — i.e., the university, a partnering incubator or the first business advisors. A good track record of non-dilutive funding is broadly seen as a good indicator of the relevance of new technologies to strategic business needs and signal technical competence to investors. Similarly, science-focused operating partners like specialized incubators, accelerators, or venture studios can benefit the founders in networking and building a brand. The move to (6), (7), and (8) is more difficult for first-time founders. Pedagogy, try-and-learn strategies, outreach, and trust-building generally help them cross the Rubicon.
Capital is a positive feedback loop. The more frontier tech startups will grow and succeed, the more innovative financial products will emerge to support their emergence and growth. Frontier tech entrepreneurs must be creative in how they approach their financing because navigating the rules and roles of money will help them and help carve a path for others.
Many science entrepreneurs describe a funding journey similar to a game of Russian nesting dolls to associate various sources of capital: whether from capital abundance, regulation, or market shifts, approaches relevant one day may not be the following. As the frontier tech ecosystem matures worldwide, so will the financing options available to pursue different business opportunities and paths to liquidity 💸
