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DeepTech Funding Guide

Dec 09, 2020


There’s no shortage of business opportunities in fields like quantum computing, clean energy, nanotech, and space. It's encouraging to see so many entrepreneurs take on these challenges.

But, these “deeptech” startups often struggle with fundraising. It's not easy to find the right financial partners who'll back a company that may require years of research and millions in upfront investment. So, we wanted to make a quick guide of dedicated funding resources for DeepTech founders, including lists of the most active investors in the space, walk-throughs of government resources, and additional readings and information.

We'll start by breaking down non-dilutive vs dilutive funding:

Non-dilutive funding methods

Non-dilutive funding doesn't require the founder to give up any equity in their company. It can range from government grant money to bank loans, as opposed to angel investing and venture capital. Here's a quick list of non-dilutive funding sources:

  • Loans require a credit check, collateral, and guarantors, and must be paid back with interest.
  • Grants are basically free money, and do not need to be repaid. Usually, they require the submission of an application and are tied to a specific project or business milestone. And the business is generally required to provide status reports on the project and/or the business milestones.
  • SBIR and STTR Programs offer funding from small seed grants for risky research to large, multi-year contracts that support multi-faceted programs. These programs focus primarily on projects that support the US Government through the Department of Defense (DoD), National Institute of Health (NIH), Department of Energy (DoE), and others.
    • SBIRs/STTRs are a great way for businesses to work out the kinks of their technology and products before reaching full commercialization.
  • Licensing intellectual property allows a company to get upfront payments from industry partners as well as regular monthly or quarterly payments to fund the business and additional development.
  • Royalty Financing allows the business to receive cash in exchange for a percentage of the company’s future revenues over a certain period and up to a certain amount.

Non-dilutive funding is valuable to any founder, deeptech or otherwise. The following three are most geared towards R&D heavy projects and ventures:

SBA SBIR/STTR

To sustain research-driven ideas, the Small Business Administration (SBA) created the Small Business Innovation Research program (SBIR).

On the SBIR website, you can find all of the relevant grants to your field of choice. You must submit a solicited proposal, after which you enter a competitive selection process. The proposal for applying entails a business plan, executive summary, cost proposal, and technical proposal.

  • Here is an in-depth look into the rules for eligibility, along with guidelines on ownership, non-profits, and more: PDF.
  • To begin the application process for SBIR funding, check out this roadmap

Applicants should identify the specific grant or grants that they are looking for on the Solicitations List part of the SBIR website. A “solicitation” is the specific grant opportunity. After locating the desired opportunity, applicants submit a proposal for “Phase I” funding.

If selected, you enter the three-phase program:

“Phase I. The objective of Phase I is to establish the technical merit, feasibility, and commercial potential of the proposed R/R&D efforts and to determine the quality of performance of the small business awardee organization prior to providing further Federal support in Phase II. SBIR Phase I awards normally do not exceed $150,000 total costs for 6 months.

Phase II. The objective of Phase II is to continue the R/R&D efforts initiated in Phase I. Funding is based on the results achieved in Phase I and the scientific and technical merit and commercial potential of the project proposed in Phase II. Only Phase I awardees are eligible for a Phase II award. SBIR Phase II awards normally do not exceed $1,000,000 total costs for 2 years.

Phase III. The objective of Phase III, where appropriate, is for the small business to pursue commercialization objectives resulting from the Phase I/II R/R&D activities. The SBIR program does not fund Phase III. Some Federal agencies, Phase III may involve follow-on non-SBIR funded R&D or production contracts for products, processes or services intended for use by the U.S. Government.”

(https://www.sbir.gov/about/about-sbir)

Winners are granted non-dilutive funding to infuse into their projects.

The SBA also has Small Business Technology Transfer (STTR) grants, which are grants with two significant distinctions from SBIR grants:

  1. STTR projects require small businesses or startups to team up with a non-profit research institution (universities or federal labs).
  2. STTR grants are focused on transferring technology from research institutions to small businesses and then to the public marketplace through a three-phase sequence.
    • If you are a university student, we recommend looking further into STTR programs.

All information about SBIR and STTR grants, along with the specific grant programs within them, can be found online at https://www.sbir.gov/.

NSF

The National Science Foundation (NSF) has grants for a lot of fields that fall under the DeepTech umbrella.

All grants can be found here. According to its website, the NSF accounts for about ¼ of federal support to academic institutions for basic research, with approximately 11,000 proposals granted out of nearly 40,000 every year. Eligibility is based on several factors; here is a comprehensive guide to proposals, awards, and procedures.

See the entire NSF grant timeline here.

All grants open and close on their own timelines, so founders should keep track of them and complete the application process accordingly. Each grant has target dates, deadline dates, and submission windows, so make sure to apply on time!

There are grants for everyone from high schoolers to post-doctorates, and from non-profits to research institutions. Some incredibly successful companies were born from NSF grants, including Symantec, Qualcomm, and IntraLase. Many of the companies that win NSF grants go on to raise venture capital from top investors.

It is also important to note that NSF has another funding program that’s separate from its grant funding. It’s called “America's Seed Fund." It invests up to $1.75mm of non-dilutive capital over 24+ months directly into impactful, advanced tech startups. Founders retain full ownership over the company and IP. It has very similar terms of eligibility as the SBA SBIR/STTR program, but the differences are that it is housed under the NSF, is geared towards commercially-viable startups, and has a different funding timeline. Best of all, America’s Seed Fund also offers portfolio company support, mentorship, and strategy advice, as opposed to only giving grant funding. Here you can find the portfolio of companies within the seed fund, which, according to CB Insights, has seen 107 exits and $9 billion in private investment since 2014.

I-Corps

Established in 2011, I-Corps offers a curriculum-based, experiential learning opportunity for founders to learn about the commercialization of R&D into an independent startup. To do that, I-Corps focuses on customer discovery and translating research from a laboratory to the public marketplace.

I-Corps emphasizes that it is not about making a business plan or funding a scientific discovery. It is rather about “talking to customers, partners and competitors; encountering the uncertainty and excitement of creating successful innovations, [and] getting out of the university laboratory to explore the commercial potential is what the effort is about.”

I-Corps cohorts run through hubs around the nation and a network of universities: There are 99 Sites and nine I-Corps Nodes nationwide:

To apply to I-Corps, teams must have three primary members: a technical lead, an entrepreneurial lead, and an I-Corps mentor. There are about 20-30 teams within one cohort. To apply, a team must submit an Executive Summary found here. Linked here is a PDF that goes into greater detail about the solicitation (application) process.

From 2012 to 2018, there have been 63 cohort trainings, 1315 teams, 3745 trained individuals, 271 universities/institutes/colleges, and representation from 47 states/D.C/Puerto Rico. As a result, there have been 644 startups, almost all fitting within DeepTech, with nearly $301mm in follow-on funding raised and 6 acquisitions.

Other

To find non-dilutive funding for deeptech ideas and ventures, always be sure to check out:

  • University-affiliated departments and research institutions
    • Tech Transfer Offices: These are key, as most American research universities have them. They are organizations that help translate academic knowledge and research into possible startups— essentially, they aid in commercialization. We recommend that founders go to Tech Transfer Offices at their universities to talk with people who are familiar with their topic of interest.
  • Independent research institutions
    • Los Alamos National Laboratory
    • Oak Ridge National Laboratory
    • Santa Fe Institute
    • Bell Labs
  • Government agencies
    • Individual departments
    • NIH, DARPA, etc.
    • AFWERX (Air Force)
    • DIU (Defense Innovation Unit)
  • Independent foundations
  • Competitions

Dilutive funding

Unlike grants and other non-dilutive funding, dilutive funding comes with additional benefits like broader networks, more press/promotion, and access to skilled advisors. You can also raise a lot more with dilutive funding.

Active VCs

According to Different Funds, a fund-of-funds-structured portfolio management firm, here’s a list of the 11 VC firms most-active in deep tech:

Note on VC Investment:

Each VC firm has specific preferences and requirements on how they go about the funding process.

The best strategy is to simplify your startup as much as possible, and run a dedicated process where you reach out (through warm intros) to the right investors at your target funds. Keep in mind that founders will often talk to dozens of funds before they complete a round. Remember the key distinctions about deep tech: it’s complex, it’s capital intensive, and it’s research-heavy. Try to ease investors' concerns here. Experienced investors in this sector understand that you won't have the same traction as a bootstrappable app, but will want to see other signs of progress.

Benjamin Joffe at SOSV has laid out common deeptech investing risks, and what investors look for:

  • Team: investors are looking for scientist-entrepreneurs. Not one or the other, but both.
  • Go-to-market: an important concept for any startup, but in deeptech, it’s important to get active feedback from your target users to ensure they understand the product/service.
  • Geography: the broader deeptech ecosystem is important and lucrative. Founders should be active members in it for the full benefits.
  • Fundability: the biggest factor— deeptech startups must be research-driven and commercialized. Will the investors get a return?

Any other funding resources for deeptech startups that we missed? Let us know and we’ll add them!

Additional Resources

Deep Tech Investing Report 2020, by Different Funds, Inc.

The Engine: Tough Tech Landscape 2019, by MIT and The Engine

Financing the Deep Tech Revolution: How investors assess risks in Key Enabling Technologies (KETs), by European Investment Bank

101 ways to lose money in deeptech angel investing, by Deep Science Ventures

The state of US science and engineering 2020, by NSF

Deeptech Trends 2019, by SOSV

Other US Government Grants

A collection of deeptech reports, by Hello Tomorrow


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