Turning groundbreaking ideas and technologies into successful businesses not only takes ambition, but it also takes the right type of funding and support, at the right time.
The Technology Investment Network (TIN) Report, released in May, highlighted that while globally startup funding fell, in New Zealand our level of venture capital investment increased with $726m of investment made into 154 deals in 2022. Further nearly a quarter of the capital raised went into deep tech.
Like other venture capital companies, we’ve seen a significant shift in the investment space with far more appreciation for the role deep tech has in solving the serious global issues we face – the future of our food, our environment, and our health. And although it takes more than money to ensure deep tech is successful, where funding is concerned, what’s important is the right capital at the right time.
Over the past 20 years, we’ve invested specialist venture capital into over 45 deep tech companies.
We use the terminology ‘specialist’ because the evolutionary cycle these deep tech companies go through is different, and their journey to commercialisation and/or exit is more complex and challenging than what a typical B2B or B2C startup might face. These are novel technologies that are often expensive to produce and difficult to scale – but the upside is success delivers outsized social and economic returns.
A number of our other articles delve into what sets us apart - our multidisciplinary team which includes scientists and entrepreneurs who can conduct specialist due diligence, and how once we’ve made an investment our involvement doesn’t end there, in addition to capital, we provide resources, networks, skills and expertise to help our portfolio companies achieve their ambition.
- Stephane Janson on carving a niche
- Emerald Scofield on being an active VC investor
- Dr Robert Powell on assessing viable deep tech investments
So, instead of reiterating our active investment approach, our aim with this article is to outline how the capital requirements of these companies differ, which combined with the added technical risk associated with deep tech, is often a key reason why many VC investors tend to shy away from deep tech.
Creating the right environment for deep tech to succeed begins really early on – often before a company is even established. A critical element of this process is having a clear understanding of what success looks like, and what’s involved in achieving success.
Taking these technologies out of a lab and into the market where they can help solve substantive social and economic issues often requires more capital, typically carrying much higher degrees of risk and longer time frames to return on the investment. So, what does this capital look like?
Let’s dive into the options and how they contribute to a deep tech company’s evolution.
Seed Funding: Cultivating the vision:
Seed funding generally marks the inception of the journey. It’s funding that is provided early on, often enabling the scaling of lab-based technology.
Many of our initial investments are at the seed funding stage and are intended to help the company prove its concept. It basically serves as the initial fuel to empower the company to validate concepts and build the foundation for future growth.
Investing at this stage requires a really strong understanding of the inherent risks and rewards associated with the tech, but also recognising the potential for the innovation to reshape industries and drive societal progress. Our seed funding is often used to:
1. Develop prototypes and demonstrate feasibility
2. Validate markets through preliminary market research and user feedback to ensure alignment with real-world needs
3. Build the right team to meet the technical and commercial needs of the business
4. Protect intellectual property through patents and copyrights
Series A Funding: Cultivating Growth:
At this stage, a startup has typically gained some traction to move beyond the conceptual phase and has demonstrated promise with a viable product or service. Startups seeking Series A funding typically have a clear business model, a prototype or minimum viable product, and some level of market validation.
Investing in Series A rounds means there’s potential for growth and market disruption. We’re not just investing in the current state of the company but investing in its future prospects. Many of our Series A investments are made in companies for which we also provided seed funding for – these are deep tech companies our team has been actively involved in shaping, often taking leadership and governance roles.
Series A funding serves several crucial purposes:
1. The injection of funds helps the startup scale its operations, ramp up production, and expand its reach.
2. Additional resource enables the startup to strengthen its core team and fill critical roles.
3. Funding enables the startup to enter new markets, targeting a wider audience and increasing its customer base.
4. Startups can further refine their product or service, incorporating user feedback and enhancing features.
5. A more substantial budget allows the company to invest in marketing strategies to increase brand awareness and boost sales.
The journey of deep tech from seed to Series A funding recognises the power of combining transformative innovations with specialist capital. While seed funding lays the groundwork for innovation and allows deep tech companies to shape their concepts, as they transition to Series A funding.
Although our main focus at Pacific Channel is to provide seed through Series A funding, our Kea fund was purposely established to support promising startups in their earliest stages, providing them distinct funding that enables them to target a specific question that we think could de-risk a value inflexion point and justify a larger investment.
While the challenges to achieving success are significant, the breakthroughs that come from deep tech are revolutionary and as a venture capital investment firm, we are in the privileged position to be a catalyst for progress and change. This is a journey that demands harmony – that aligns ambitious and visionary founders with active investors to transform these ideas into technologies that will shape our future.
