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.
The biggest challenge in deep tech is not the technology itself, but turning it into a product and finding your customers.
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.