What is Deeptech and Why Does it Matter?
Typically, the first question we get asked by people outside Boreal Ventures is: what is deeptech? We wanted to spend some time explaining what sets deeptech startups apart from their other tech peers and why we think there’s a need for early-stage capital in the industry.
Deeptech companies build research and development-based products, usually with the goal of solving large and fundamental problems. In a study by BCG and Hello Tomorrow, 97% of deeptech companies surveyed were tackling at least one of the United Nation’s Sustainable Development Goals.
Both Market Risk and Technology Risk
Deeptech companies can be characterized as having both high product-market fit risk and high technology risk.
The product-market fit risk of deeptech startups is significant in the early stages, when they have yet to develop a working prototype and put it in the hands of customers. With no working prototype, it is difficult to sufficiently gauge the traction of the product with customers and the true potential of the market.
The other important risk to consider is the technology risk. Sometimes, what works well at a small scale does not work well in a commercial product or in mass production. Deeptech companies are often also held to a high technical standard, since technical failures in life sciences or industrial settings, for example, can have dire consequences.
Deeptech companies often have difficulty finding investors who are willing to take on both the technology and product-market fit risks. Their lack of funding causes them to further struggle to de-risk their business, which perpetuates the problem even further.
Larger Capital and Time Requirements
Due to their highly technical nature, deeptech companies typically take longer to get to market. It can take months to years for their technology to be commercialized. This can be partially explained by the fact that it takes significantly more time to iterate over a physical product than it does over a software product. It’s also important to consider that fundraising takes longer at each stage, and that sales cycles are typically slower as well.
Deeptech companies also often require more capital than other tech startups, largely due to the larger financial requirements of research and development. The costs of using lab space, iterating over a physical product, and running technical tests are burdensome for startups.
Nonetheless, these capital requirements are heavily front-loaded, so it can be argued that once these companies have a successful commercial pilot and a solid protective moat, selling to large customers can be much more cost-efficient. Herein lies a key fundamental difference between deeptech startups and consumer and enterprise software startups; while the former acquires a protective moat around its IP and the stickiness of the solution, the latter does so through acquiring massive market share and economies of scale.
The Funding Gap
Boreal Ventures funds deeptech companies at what we think are the most exciting stages in their journey: the pre-seed and seed stages.
There is currently a gap in the deeptech early-stage market in Quebec, largely due to the perceived risk of these companies. In the early stages, however there is an abundance of non-dilutive funding that companies can tap into, which helps alleviate the burden of the high capital requirements of research and development.
Despite these challenges, research from the BDC shows that deeptech companies are disproportionately more impactful than traditional VC-backed firms. From 2014 to 2019, deeptech startups attracted 11% of start-up funding but were responsible for 17% of unicorns during that period.
Our approach to de-risking our investments is to start conversations with later-stage investors earlier. This allows us to better understand which companies are more likely to be able to raise capital later down the line and continue growing. This approach also provides later-stage investors with a first look at potentially interesting companies to track.
Our goal is to provide investors from all corners of the world with eyes on the deeptech market in Quebec. We believe that our role is to connect these global investors to the best possible opportunities here, and that this approach will be a key catalyst for growth of the businesses that we support.
At Boreal Ventures, we truly believe there is a gap in funding at the pre-seed and seed stages in deeptech, and we feel that we are the right partner with the right approach to help close it in Quebec.