How deep tech founders can secure early-stage fundraising in a downturn

The funding environment in 2013, when we at Cailabs were looking for early-stage investment, was a tough one. According to some metrics, it’s much like the one we find ourselves in today.

Startup founders must persuade investors to part with their money at a time when many investors aren’t inclined to do so. And that’s even harder for deep tech founders, whose products are often highly complex and highly distinct.

Back in 2013, we managed it, and we learned many lessons — some counterintuitive — along the way. Here we share the lessons we learned, which can help other deep tech founders looking for funding during a downturn.

Don’t overvalue competition

In the early stages, the number of investors who truly understand what you are doing and can invest in your field is small — in our case, you could count them on one hand. In such circumstances, focusing on competition between investors can be detrimental.

This flies in the face of the advice usually given by investment banks or intermediaries, whose value is in part connected with their ability to provide efficient access to multiple investors. In deep tech, in the early stages, and in a difficult funding environment, what matters is the robustness of the deal, not the number of flimsy term sheets.

What is more, in the early stages, deep tech investors working in a given area know each other well, further limiting competition. We experienced this firsthand when reaching out after having received an offer from a well-known lead investor.

Other investors got wind of the term sheet and went from considering being lead to asking to join in the round as a follower. Turning down their request to join in order to foster competition was actually detrimental to our round: They elected not to compete, and we lost the stabilizing force of an extra committed investor in our consortium.

Deep tech, we learned, is not like SaaS: SaaS companies can expect competition; deep tech companies, especially in the early stages in difficult funding environments, should focus first and foremost on closing the deal. Strengthening a single consortium of investors, nurturing the relationship, and fostering a sense of FOMO within that group can be the best way to do so.

Nurture an ongoing relationship with a small group of investors

Developing a relationship with the small number of investors you identify is critically important, and you should get started early on. As a gesture of trust, and recognition of the expertise of the VCs we identified, we gave them a very early look at our pitch, before it was even close to being finished.

It was our way of starting a conversation with them, gauging our compatibility, and showing we wanted their feedback. Their experience and the relationship we hoped to build was important to us — even if that came at the cost of presenting a perfectly polished pitch in the first instance.

So we said, “Look, it’s not perfect, but we value your guidance so much that we’re going to show it to you early.” That might sound counterintuitive, but it was a vital part of our fundraising story.

Be very wary of the hype

History is full of instances in which the actual value of something deviated wildly from what people were willing to pay for it. Often, the reason these “manias” and “bubbles” come about is because of hype. And hype doesn’t last. So if there is a lot of hype around your product (as there is at the moment with AI and anything that includes the word “quantum”), be very wary. It is the best time to raise, but aim to define the terms of your deal so that when things have cooled down and people are thinking rationally, you are still in the black.

Another danger is that, when there is hype around your product, you can attract less competent investors. The competent ones, even if they leaped onto the bandwagon early on, will have gotten off once valuations began to depart from reality.

You risk attracting “adjacent” investors who have merely heard that your product is valuable but lack the experience or expertise to know whether it really is. They won’t understand the risks involved, and they won’t be able to give you the guidance you need to develop your business.

I had an interesting conversation with one of our investors, who said that their firm consciously took the opposite approach. When there is hype around a given area, they never invest in that area, almost as a matter of principle. They seek out only underdogs; that way, they know their investment is based on hard facts, not what people are saying.

Red flags to look for

You need to find an investor who knows your product and your market. You’ll know if they’re the real deal if they understand the language you’re using and if they’re asking penetrating, challenging questions. If you’re being pressured on the specifics of what you’re doing, that’s a good sign: It shows the investor knows what to look for.

The biggest challenge in deep tech is not the technology itself, but turning it into a product and finding your customers. You need an investor who understands this and will probe you until they’re satisfied that you’re in a position to achieve this. Difficult questions, therefore, are your friend.

If you’re the one educating the investor, then then is a big red flag. You don’t want to be telling an investor about deep tech investing or your area, however rewarding it might feel to show the breadth and depth of your own knowledge. You don’t want a follower in your lead investor; you want somebody who brings conviction to the table.

Another potential red flag is an investor who shows too much interest in your financial forecast in the early stages. It can indicate that the investor doesn’t feel confident asking about your tech and product.

Of course, your numbers matter, but ultimately any market size estimate for early-stage deep tech needs to be taken with more than a grain of salt. Assessing tech and product is more immediate and discriminating. If your technology isn’t up to scratch, market size will not matter.

This was very important to us, because we operate in a highly specialized area. At Cailabs, we develop and provide photonics solutions for the ground segment of the space market. It would have been very dangerous to go with any investor who didn’t get it. Luckily, that didn’t happen.

For our latest round, we met one of our biggest investors, NewSpace Capital, at a technical optical conference — not the kind of place you tend to meet investors. They had international experts to support their due diligence. We were asked the kind of tough questions that gave us confidence that showed us that this investor was serious and understood our product.

It goes without saying that every founder’s journey will be different, and there will be surprises along the way. But these rules of thumb will nevertheless protect you from making major mistakes during the funding process and will give you the best chance of finding the kind of investor who can help you realize your vision for your product.