SaaS founders thinking about what they need for their next funding round can turn to Point Nine’s popular annual report, “SaaS Funding Napkin” (the term refers to “back of the napkin” plans and calculations).
Now, the European Hardware Deep Tech team is getting similar resources from First Momentum, a pre-seed fund that invests in technology B2B and deep tech startups.
Through DeepTech Hardware Napkin, the German venture capital firm wants to democratize knowledge and benchmarking on funding, team, product and commercialization, step by step. The company focuses on the fast-growing deeptech sector in Europe, which delivers very different results than those seen in global SaaS.
Benchmarking is especially helpful for first-time founders or those who don’t have a large network of startups or venture capitalists. This is especially true in the deep tech space, where many entrepreneurs come from academic backgrounds. “They don’t know what’s a wrong decision and what’s a good decision because they don’t have the data. They’re not in a circle of entrepreneurs, they don’t have 10 to 15 friends who’ve started a company before,” general partner David Meiborg told TechCrunch.
To combat this lack of knowledge and uncertainty, First Momentum surveyed 30 deep tech venture capital firms in eight countries, Meyborg said, and compiled the results in a full report, not just on a “napkin.”
The firm kept its observations to a minimum in the report, as they valued objectivity, but Meyborg and Ochs agreed to discuss one interesting finding with TechCrunch: “At seed and Series A, teams led by highly technical CEOs (without a business background) raise significantly more funding than teams led by CEOs with a business background.”
The sample is somewhat biased: “The startups featured in our study have either raised or are seeking to raise venture capital funding, and are therefore relatively successful at a certain stage.” This means that the tech CEOs in the sample are not fully representative. If they are successful in raising funds, it is probably because they also have commercial knowledge.
Still, it has been shown that founders with technical profiles can benefit greatly if they add business skills and knowledge to their toolset, and with a robust pipeline of university spinouts, Europe has a lot to offer if founders get it right.
First Momentum wants to help these tech founders not only through the report, but also through a community called Clueless No More, where aspiring “European scientist entrepreneurs” can learn from each other. For example, they can discuss the sore points raised by Luna Capital associate Francesco Ricciuti: “Cap tables matter. Don’t let poor tech transfer diminish your chances of success,” Ricciuti warns in the report.
Deep Tech is Different: Higher Funding and Longer Path to Success
The report notes that pre-seed and Series A deep tech hardware rounds are larger in 2023 than in 2022, which First Momentum interprets as a sign of growing investor interest in the sector. The data bears this out: globally, deep tech accounts for 20% of venture capital funding, up from around 10% a decade ago. This is partly due to the nature of the sector: deep tech requires significant upfront investment, so rounds are typically larger than average.
Intuitively, Meyborg already knew that Data was different from the average startup. “The thing about deep tech investing is that you take mostly technology risk, but you compensate by taking less market and commercialization risk,” he said. He gave the example of startups finding a cure for cancer: “They’re hard to execute, but not hard to sell.”
This explains the report’s finding that only 29% of startups achieve repeatable sales activity and meaningful revenue, even at the Series A stage. Maximilian Ochs, a member of First Momentum’s investment team, said that while this wasn’t surprising, he took it as evidence that it takes time for deep tech startups to become profitable.
This requires reverse engineering, Ochs said: Entrepreneurs need to identify what milestones they can hit to convince investors to raise the next round of funding. First Momentum also calls this process “de-risking,” and Ochs suggests founders figure out what their costs are, what gross margins they can realistically achieve, and what their end goal will cost.
Julian Macke and Clement van Driessen of Elaia, one of the venture capital firms that participated in the survey, also mentioned the hurdle of raising a Series A, telling TechCrunch that many hardware startups struggle due to a lack of proof of market fit. This requires a strategic approach backed by significant capital, ideally from investors around the world, they said.
“Engaging a global investor syndicate from day one not only ensures the funding required for this intensive capital expenditure effort but also facilitates critical support to achieve key business milestones,” they noted.
