Software companies can quickly develop a product that is good enough to try out. They need the talent to do that, of course, but they don’t need capital to invest in expensive machinery and finance the ramp-up of their production. Software startups can improve their product on an ongoing basis, while first revenues already start to flow in. But building machines or equipment means no revenues until the design has been finalized, which often means multiple iterations, tests, and improvement cycles. Entering the market with an unfinished or flawed product can kill a deep tech startup.

Fundraising is easier for software startups too. If they get early commercial traction, they are able to confidently raise more funds to intensify their sales efforts, which in turn fuels even more growth. Software companies tend, on average, to have much shorter exit times than hardware companies. Venture capital funds tend to prefer fast exits, other things being equal. With software startups, technology is not a determining risk factor; growth and market acceptance is. Will customers adopt this software and happily pay for it, and will the startup continue to double its revenue every year? If yes, such a company can become very valuable in a matter of a few years. This is why many investors, including Verve Ventures, like software startups.

Deep tech hardware is a completely different story. We call novel technologies that are based on scientific excellence deep tech, and most of the time, deep tech startups are spin-offs from the worlds leading universities. That’s why we have close ties to leading universities in Europe such as ETH, EPFL, and Cambridge, for example. Deep tech startups share the challenges of other startups, such as hiring and building up a company and selling their product, but on top of that, they also face significant technical hurdles to bringing their products to market readiness. The question is not just “Will it sell?”, but also “Will it work?”. An assumption can be made that if a ground-breaking product works, clients will be convinced by its technical merits.

It takes time to build things, even more so if these things are complicated.

It takes time to build things, even more so if these things are complicated. Pushing the boundaries of physics usually means that it takes many iterations until a machine does what it was envisaged to do in the lab. Parts need to be sourced and paid, tests need to be made, and rent and salaries paid long before any revenues can be achieved. Medical products must overcome high regulatory hurdles that assure their safety, a long, costly and complicated process. Delays are commonplace. Failure to assure market approval could mean the end for a startup. Many investors aren’t comfortable with taking this kind of risk.

In some cases, the market for a deep tech product might not yet exist, which means that startups need to hire highly qualified technical sales specialists to convince potential customers which might have rather long decision time-frames. At the same time, investors with deep pockets and a deep understanding of this novel technology and long investment horizons need to be found and convinced. Assessing the key metrics of a Software-as-a-Service startup is straightforward. Qualifying the technical risk of cutting-edge technologies is a much less precise endeavor, and you need access to leading specialists in the respective field to do it. These are all reasons why investing in deep tech hardware is harder than investing in software.

So why bother? Verve Ventures invests in deep tech, and with a big appetite. This is because we believe that deep tech startups can solve big problems. Their products, once they hit the market, make things possible that weren’t possible before and advance society. Digitization and data are surely needed. But people still rely on the built world for food, shelter, and energy. Solving the biggest problems humanity faces will not be possible with software investments alone, positive impact needs much more capital. Examples from our portfolio include Insolight, which produces a novel translucent solar cell that can be used for agrivoltaics (covering agricultural fields with energy-producing solar cells instead of plastic sheets). Puraffinity is developing adsorbent materials that allow to filter PFAS, also called “forever chemicals”, out of water. Fineheart has developed the first permanent pump that is inserted directly inside the heart, is wirelessly charged and can be installed into the heart during a minimally invasive surgery.

Another startup, ecoRobotix, has developed high-tech farming equipment that allows farmers to reduce pesticide use substantially. 9T Labs manufactures 3D printing equipment that allows high-volume production of thermoplastic composites which makes it possible, for example, to produce more lightweight aircraft components and save fuel. CleanGreens aeroponic farming solutions allow growing leaf vegetables in a more water-efficient way than traditional methods. The list goes on; some of these startups have been awarded the “Efficienct Solution” Label from the Solar Impulse Foundation.

Sometimes, deep tech innovations enable the emergence of other technologies, often software, or help them succeed. Startup Scrona opens up new manufacturing possibilities for displays and electronics with its nano-printing technology. Kiutra has developed a cooling device that can cool down and keep samples at temperatures below -272 degrees without using the rare isotope Helium-3 which facilitates scientific research and accelerates quantum hardware development.

Scipio Bioscience has launched a sample preparation kit designed to democratize single-cell sequencing experiments that enables researchers discovering new insights in all fields of life sciences, including neurology, oncology, and gene-environment interactions. Nano-satellite operator Astrocast enables new insights with its IoT capabilities. And drone manufacturer Wingtra makes digital mapping of entire cities possible.

Their impact is an additional reason why we firmly believe that despite the challenges these startups have, they also offer an attractive risk/return profile. Deep tech is much less crowded than information technology, which means that initial valuations of startups tend to be attractive and less prone to excessive valuations driven by many VCs chasing the startups with the highest growth. What is more, in deep tech the valuation usually increases in a pattern resembling a staircase once a startup achieves specific milestones (such as market launch), whereas SaaS companies are valued in line with the growth of their recurring revenue. This, in turn, means that investing at the right time in a deep tech startup can result in quite attractive returns.

Deep tech startups also face different competitive dynamics. Because once they have built their product and started selling it, these companies have a strong economic moat. Their competition cannot easily copy what they do, even if they have a lot of money, because patents will prevent them from doing so. The competition cannot just spend a lot on marketing and corner the market, because technical specifications don’t lie. Deep tech startups don’t just develop products that are a bit better than the industry standard. These products either achieve what no other product does or they are able to do so far more efficiently than others.

Deep tech startups need advice from people who understand the decision-making processes of potential clients and know decision-makers in these companies. Demonstrating a product to the R&D department of a big corporation is not the same as selling this product to the firm. Verve Ventures’ large network can help startups to identify persons with senior business experience in many different industries.

Another reason why Verve Ventures invest in deep tech with conviction is that Europe’s technical universities produce exceptional engineering talent and that the continent has a rich tradition and strong economic tissue of companies that excel in mechanical engineering. There are countless small and medium-sized enterprises that are specialized in solving problems, building special parts, and custom machinery. There is no such widespread high-tech manufacturing excellence in other parts of the world. And the innovation that successful deep tech startups bring to the market means that these suppliers are busy and can invest in new machinery as well.

The general public knows about the big software success stories because they are consumer-facing, and because of the constant media coverage of those who have grown big. Startups that produce complicated machines bought by research labs and other companies aren’t known to the public. And if these startups get acquired by other, larger companies, it is usually only of interest to industry insiders. This doesn’t mean that as an investor in a deep tech startup you cannot get very attractive returns. It is just, perhaps, that there is less fame in it.