How to Pitch Hard Tech to a Generalist VC
A few months ago, I wrote a post about the current hard tech renaissance and the challenges founders face when trying to raise capital for hard tech / deep tech startups. That post resonated with a lot of folks and I was subsequently invited to talk about it at Startupfest in Montreal. The conference organizers gave me the following prompt:
Shed light on the Canadian hard tech landscape, the reality of engaging with VCs, and the realities of raising capital as a hard tech startup.
It shouldn’t come as a surprise that despite a resurgence of interest in hard tech, convincing early-stage VCs to invest is still really hard. For many hard tech founders, the experience of raising pre-seed capital often feels like this:
I started digging into the numbers: how many Canadian VCs have actually invested in at least one hard tech startup? It turns out, quite a few:
Some of the Canadian VCs who have recently invested in hard tech
If so many VCs are willing to invest in hard tech startups, why does raising pre-seed capital still feel so hard? It starts with a simple fact: the vast majority of VCs that invest in hard tech startups aren’t actually hard tech VCs. They’re generalists. And generalist investors often come to the table with stereotypes and preconceived notions that can get in the way of making an investment.
Thankfully, Leo Polovets of Susa Ventures / Humba Ventures is helping to dismantle many of the misconceptions around hard tech investing.
Two years ago, Susa Ventures announced a spin-off fund led by Leo called Humba Ventures. Humba’s mandate includes a specific focus on early-stage investing in hard tech / deep tech. Leo — a very data-oriented VC — published a post titled Betting on Deep Tech that shared some of the detailed research he did to better understand the historical performance of deep tech investments and convince himself that a deep tech-focused fund was viable. He found that the following four assumptions about deep tech companies turn out to be misconceptions:
Deep tech companies have poor outcomes.
Deep tech companies are much more capital intensive.
Deep tech companies take much longer to exit.
Deep tech companies have much higher failure rates.
(If you haven’t already, I highly encourage you to read the full post here.)
Of course, there are some nuances to these conclusions. Leo found that some of the stereotypes around hard tech companies are actually true. For example, certain sub-categories in hard tech — such as life sciences — are inherently capital intensive. So what does that mean when it comes to raising early-stage capital?
To increase your chances of success with generalist VCs, you need to credibly make the argument that your startup fits the traditional venture capital model. Which means arguing that the stereotypes listed above don’t apply to your company.
1. Outcome Potential
Assuming that you’re pitching to a power law VC, you need to demonstrate that your company has the potential for a multi-billion dollar exit. There are three factors that come into play:
Historical Exits - What exits have occurred in your industry for similar companies and at what stage of development?
Exit Multiple - For revenue-based exits, what is the historical multiple for your industry?
Revenue Trajectory - What is a realistic revenue trajectory for your company?
With the three pieces of information above, you can suggest potential scenarios that might occur (e.g. this is what is likely to happen if we get acquired at point X, this is what happens if we get acquired at point Y, and this is what happens if we IPO).
Note that this is different from saying “this is our exit plan” (which is a bad thing to present — at least, when pitching to North American VCs). Rather, you’re trying to paint a picture as to the potential of your company to achieve the scale of outcome necessary to return a VC’s fund.
2. Capital Requirements
Generalist VCs are very wary of capital-intensive companies, as their funding needs can dilute the investor’s holdings such that they won’t realize a significant return even if the startup is a breakout success. To counter this, you need to demonstrate that the amount of dilutive funding that your company will require is not dissimilar from what a software startup might need.
In this case, I’m not talking about a detailed, 10-year financial plan. What I’m referring to is understanding the amount of capital that will likely be required to achieve each of your key milestones (prototype, regulatory, product, GTM, etc.) and the levels of non-dilutive funding that you can realistically access to help defer those. Showing these milestones in 12-24 month phases will best align this with the traditional VC model. For example:
Milestone 1 (12 - 18 months): $5M ($1.5M equity / $3.5M non-dilutive)
Milestone 2 (15 - 21 months): $15M ($5 - 6M equity / $9 - 10M non-dilutive)
…
Be sure to list as many of the sources of non-dilutive capital as you can for each phase, in order to add credibility to your predictions.
3. Exit Timeline
Generalist VCs typically look for exits to occur in 7-10 years. You can counter the fear that your hard tech startup might take “too long” by adding a timeline to (1) and (2). How long did it take for the historical exits described in (1) to occur? How do those timelines map to the milestones described in (2)?
4. Failure Scenarios
One of the most powerful things any startup can do in their initial pitch is to be forthcoming about the “likely reasons we will fail”. For a generalist VC that isn’t an expert in your space, the risk of failure can seem much higher than it actually is — so countering any preconceived notions is crucial.
For each of the milestones described in (2), lay out the risks that could prevent you from succeeding along with the actions that you’re taking (or have already taken) to mitigate those risks. If there are recent examples of companies in your space that failed, explain why their situations don’t apply to your startup.
The details above are likely too much to include in your initial pitch, so add them as an appendix to your deck or include them in an “investor FAQ” that you distribute after your initial meeting (just make sure to telegraph to the VC that you’re going to send this after the call to preempt them from jumping to conclusions). You won’t be able to convince every generalist VC that your hard tech startup is a fit, but by countering common stereotypes, you can significantly increase the number from whom you receive serious consideration.
