Going Deep at Pre-Seed

Lessons learned investing in early-stage deep tech companies.

In2017, Real partnered with leading Quebec institutions to launch Orbit, a fund to back ambitious Quebec-based startups at their earliest stages of development. Orbit’s investment thesis centers on identifying areas of local excellence. Given the strength of Quebec’s universities, we had a strong feeling from the start that companies building deep tech, or “disruptive solutions built around unique, protected or hard-to-reproduce technological or scientific advances”, could be a pillar of our portfolio.

Looking back after three years, it’s clear that our instinct was right. Orbit has made a dozen deep tech investments across a variety of domains, including biotech, energy, quantum, semiconductors, robotics, ag tech and neuroscience. Building the portfolio and supporting our deep tech founders has been eye-opening at many levels. In this post, I share some of our motivations for investing in the category and lessons we’ve learned helping our companies grow.

Why Deep Tech

At Real, we believe deep tech has a unique capability to drive investment returns while addressing pressing societal problems. By merging the power of software and data with the physical world, deep tech companies can attack problems such as energy efficiency, food sustainability and disease prevention that are at the core of human existence. Because deep tech companies take on novel and difficult problems, their path to market can be challenging and the capital requirements are often significant. But companies that do gain traction can establish strong competitive moats, through patent protection and hard-to-copy products. Deep tech companies also excel at creating long term advantage by mobilizing government and social support.

As geographically-focused investors, we also believe that deep tech represents one of Canada’s great natural resources. Canadian research universities are world renowned. This strength runs from coast to coast, but it is especially pronounced in Quebec. McGill and UDeM, global top 100 schools, lead the way, producing large talent pools and cutting-edge research in many fields. Concordia, ETS, University of Sherbrooke, UQAM and University of Laval also boast strong programs in science, engineering and business. As global economic competition continues to increase, we believe that these universities will be one of the enduring sources of competitive advantage for Quebec and Canada as a whole.

Adding to the attractiveness of the sector, Canadian universities have begun to excel at building deep tech ecosystems around accelerators and incubators. The most notable example is the Creative Destruction Lab, launched at University of Toronto’s Rotman School and now at nine universities globally, including HEC in Montreal. Many Quebec schools have made strong contributions as well. Centech, a deep tech focused incubator backed by ETS, was recognized last year as a top 20 university incubator. McGill’s Dobson Cup and X1, University of Sherbrooke’s ACET, and Concordia’s D3 all have strong track records supporting deep tech. Front Row Ventures, Real’s student-run fund, works across 20 campuses in Quebec and Ontario. They have backed a number of deep tech companies in both markets.

Lessons Learned

Deep tech companies come with a number of unique challenges, from team building and IP protection, to technology development and go to market. While we’re still learning every day, over the past three years we’ve identified some patterns in how deep tech companies succeed. Below are a few that stand out. We hope they are useful to other founders and investors as they push forward with their own businesses.

1. Technical founders need to level-up or team-up

Most deep tech companies are founded by scientists or researchers. That’s great for building products, but it can prove challenging when the company needs to focus on selling and scaling the team. To nail the business side, deep tech founders need to level-up their own skills or add high caliber business talent. Both paths are viable in our experience, depending on the interests and volition of the team. Whatever path they choose, founders should cultivate authentic awareness of their strengths and weaknesses and make decisions that prioritize the long term success of the company.

2. Ensure the university’s cut is fair

Deep tech companies often get their start in a research setting. In such cases, the university is usually compensated through royalty payments or, less frequently, via equity. The topic of university licensing could be a blog post in itself. For our purposes, the important message is simple: whatever deal has been cut, it should be structured to facilitate the company’s growth and commercial success. In cases where a company or investors feels this is not the case, we have found it possible to renegotiate, provided the company is patient and the negotiation is made in good faith.

3. Supply chains are strategic

Many deep tech companies build hardware. This brings a myriad of product development challenges. One of the most consistent in our portfolio has been managing the web of suppliers and manufacturing partners in the supply chain. Time and again the reliability of these suppliers and availability of key components has had an impact on product availability and hence business results. To mitigate the risk of supply chain issues, we advise founders to assess partners thoroughly, build backup sourcing, and account for worst-case scenario delays when ordering parts.

4. Get that free money

Compared to traditional software, deep tech can be expensive to build. To soften the blow and extend crucial runway, deep tech companies should fully leverage non-dilutive financing options. Alternative financing comes in many forms. Some companies find ways to utilize university labs and labour. Others take advantage of specific grant programs. In Canada, deep tech companies are also prime beneficiaries of the NRC’s IRAP program and R&D tax credits, as well as institutions like MITACS and MILA that facilitate access to university researchers. Whatever the approach, a well-orchestrated, non-dilutive strategy can deliver impressive results. Some of our deep tech companies have raised as much as two dollars in non-dilutive funding for every one dollar of equity.

5. Strong syndicates, well managed

We believe strong investment syndicates are important for all pre-seed companies. But for deep tech companies, a complimentary group of investors can be especially helpful given the unique technical and business challenges. If a domain has vertically-focused investors, that’s a great place to look. But a diverse group of engaged generalists can also make a big impact, with each investor adding different networks and insights. Once a strong syndicate is formed, we recommend that all founders run quarterly investor check-ins to keep the group informed and aligned. Beyond providing structure for managing investors, quarterly check-ins can act as a forcing mechanism for founders to step out of the day-to-day operations and think strategically about the company. They also facilitate the transition to formal board meetings as a company matures.

6. Whatever the tech, it’s still all about the founders

A truism that is just as true in deep tech: in the end, founders make it all happen. As investors we provide fuel and guidance, but it’s the founders who fly the space shuttle to the moon. While this is not a revelation, it is a good chance for us to shout out our awesome deep tech founders. Thank you to the teams at Biointelligence, Drop Genie, Eno, Invivo.AI, MIMs, Nectar, Nplex, Omnirobotic, Ossiaco, Sollum, Spark Microsystems, YPC and our unannounced investments. We are grateful for the chance to work with you.

Looking Ahead

With strong ecosystem momentum, committed support from universities and government, and an ever-increasing pull of problems to address, we believe deep tech will continue to thrive in Quebec and across Canada. As you can judge from this post, we are excited to be part of that and look forward to continuing to support and foster the development of the next generation of deep tech founders. If that’s you, let’s chat about what you’re up to!

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Thanks to Alan Macintosh, Eloise Flesh, Janet Bannister, Laura Easton, Lauren Heller, and Daniel Souweine for comments and support on this essay.