Deep tech startups with very technical CEOs raised the biggest amount of money, research finds

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SaaS founders trying to figure out what to do for their next round can refer to Point Nine’s famous annual SaaS funding napkin. (The term refers to the plans or calculations “on the back of the napkin.”)

Now, European hardware deep tech teams have a similar resource from First Momentum, a pre-seed fund investing in technical B2B and deep tech startups.

With its deep tech hardware napkin, the German VC firm hopes to democratize knowledge and benchmarks on funding, team, product and commercialization, broken down step by step. It focuses on Europe’s blossoming deep tech sector, which is producing results quite different from those seen in global SaaS.

First Momentum Ventures Deep Tech Hardware Napkin
Image Credit: First Momentum Ventures

Benchmarks are especially helpful for first-time startups or those without a large network in startups and VCs. This is especially true in deep tech, where many entrepreneurs come from research backgrounds. “They don’t know which decision is wrong and which is right, because they don’t have the data on it; they’re not in entrepreneurial circles, they don’t have 10 to 15 friends who have started companies before,” general partner David Meiborg told TechCrunch.

Meiborg said First Momentum surveyed 30 deep tech VCs from eight countries to combat this lack of knowledge and ambiguity. The results have been compiled not just into a “napkin” but into a full report.

The firm kept its comments in the report to a minimum, as it wanted it to be objective. But Meiborg and Ochs agreed to discuss an interesting finding with TechCrunch: “At seed and Series A, teams led by very technical CEOs (with no business background) raise significantly more funding than teams led by CEOs with business-related backgrounds.”

First Momentum Ventures - Average Change in Deep Tech Hardware Round Size
Image Credit: First Momentum Ventures

There is a bit of sampling bias involved: “The startups that appear in our survey are relatively successful for a given stage, because they have either raised VC funding, or are about to do so.” This means that the tech CEOs in the sample are not perfectly representative; if they were successful in raising funding, it is likely because they also have commercial acumen.

Nevertheless, it shows that founders with technical profiles can benefit greatly if they add business skills and knowledge to their toolset. With a strong pipeline of university spinouts, Europe has a lot to gain if founders can do it right.

First Momentum hopes to help these tech founders not only through this report but also through a community called Clueless No More, where ambitious “European scientific entrepreneurs” can learn from each other. For example, they can discuss a serious issue raised by Runa Capital partner Francesco Ricciuti: “The cap table matters. Don’t let poor technology transfer undermine your chances of success,” he warns in the report.

What distinguishes deep tech: bigger rounds, longer road to success

The report said pre-seed and Series A deep tech hardware rounds were larger in 2023 than in 2022, which First Momentum interprets as growing investor interest for the sector. Check out the data: Globally, deep tech claims a 20% share of venture capital funding, up from about 10% a decade ago. Part of this is the nature of the sector: because deep tech requires significant upfront investment, rounds are typically larger than average.

Intuitively, Meiborg already knew that Data would look different from the average startup. “The special thing about deep tech investing is that you take mainly technical risk, but this is compensated by low market or commercialization risk,” he said. He gave the example of a startup that would find a cure for cancer: difficult to do, but not difficult to sell.

This explains the report’s conclusion that even at the Series A stage, only 29% of startups have reached repeatable sales momentum and meaningful revenue. Maximilian Ochs, one of the members of First Momentum’s investment team, did not find this surprising, but he saw it as confirmation that it takes time for deep tech startups to reach revenue.

Ochs said this requires reverse engineering: Entrepreneurs need to identify what milestones they can reach to get investors to do their next round of funding. First Momentum also refers to this process as “derisking.” Ochs suggests founders understand their costs, the gross margins they can realistically achieve, and the cost of their end goal.

Julien Maquet and Clement van Driessen of Elia, one of the VC firms that participated in the survey, also mentioned the Series A hurdle, telling TechCrunch it is “where many hardware startups struggle due to insufficient proof of market fit.” According to the two, this requires a strategic approach coupled with adequate capital — ideally from global investors.

“Engaging a global investor group from day one not only ensures the necessary financing for this capital expenditure-intensive journey, but also provides critical support to achieve key business milestones,” he added.

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