What the FOAK?! How are we supposed to cross this valley?
Thoughts on DeepTech #3
In these Thoughts on DeepTech, I reflect on a few “aha” moments and thoughts regarding the valley of death in the context of Deep Tech startups, which I had during my first visit to The Engine, MIT’s own Deep Tech VC and Accelerator, as well as during a guest lecture last week. Let’s jump in.
The period characterized by losses between the inception of a startup firm and the development of a viable product- or service-based business model leading to profitability is commonly referred to as the valley of death.
During this period, startups leveraging established technology platforms (e.g., in SaaS businesses) to address specific identified customer needs prioritize swift market penetration through aggressive sales and marketing efforts to scale rapidly, capture market share, and ultimately achieve profitability.
In contrast, for Deep Tech startups, overcoming this initial “valley of death” primarily entails developing and constructing a functioning prototype at all, with actual market entry still a long way off.
For Deep Tech startups, the average financing rounds in these early stages (Pre-Seed, Seed, Series A - you name it) are already significantly higher, typically up to $15 mn, compared to non-Deep Tech startups.
And this is just the beginning compared to what follows next.
For Deep Tech startups, there’s a second, even more significant hurdle to overcome, known as the first-of-a-kind (FOAK) valley of death. This one is far more daunting, as I learned during a guest lecture at MIT held by Lisa Hansmann, a senior advisor at the MIT Center for Energy and Environmental Policy Research.
The FOAK valley of death is typical for physical asset-heavy Deep Tech ventures, particularly in climate technologies such as carbon capture and storage systems or advanced nuclear technologies, presenting a significant roadblock to the ultimate commercial success of these technologies. In specific, it describes the critical phase between prototype development and the subsequent commercial deployment of these technologies at scale.
Given their pioneering nature, Deep Tech startups face heightened technological and commercialization risks due to the absence of established benchmarks or clear commercialization pathways, necessitating consistently high capital requirements for deployment and scaling. Capital requirements during this phase can range from $100 mn or more, depending on the technology, and may potentially reach up to $1 bn in the future.
The convergence of technology-based and operational risks, coupled with ambiguous unit economics and market volatility, results in a scenario where few investors are willing to fund such FOAK ventures. This funding gap often leads to the stalling of numerous Deep Tech projects at this stage.
Capital providers such as banks or government funding vehicles, despite their capacity for such substantial investments, frequently perceive the risks as too large or experience sluggish funding processes. Venture capitalists, on the other hand, either find the investment amounts too high or require evidence of traction and revenue during these early stages. This poses a challenge because such proof cannot be provided as the ventures are not yet on the market, and even if they were, success cannot be guaranteed due to the aforementioned risks involved.
Taken together, when talking about the commercialization of Deep Tech ventures, it is crucial to consider the FOAK valley of death. Establishing support systems and pathways to navigate this phase will be ever more critical for guiding startups beyond prototyping and enabling their broad adoption and impact.
Achieving this goal may involve establishing venture capital funds that can make significant investments in later funding stages as well as are willing to take on more risks and adopt longer time horizons. Furthermore, forming strategic partnerships and implementing accelerated grant funding mechanisms are essential components of this endeavor. In sum, making sure that such important innovations are funded will be key to making an impact and tackling the major challenges of our time.
