This is a write-up from Scale Up Talk – Keys of Growing Deep Tech Startups, hosted by wiseocean.g-l.ventures on 10/28/2021.
Self-Introductions
Mikko Kumpulainen, Voima Ventures
Tuomo Virkkunen, Boardio
Hani Elshahawi, NoviDigiTech (with the introduction of Shell GameChanger program)
Q&A from the Roundtable
Jessie: How do you evaluate the IP or core technology of deep tech startups in diversified fields?
Mikko:
When a deal flow comes into our hands, we pick which partner from our team is going to take a look at that case – some are familiar with Med Tech, some are experienced in process innovations, there are different expertise in our team.
We also use third-party IP consultants to do assessments. Then, of course, we have very good connections to VTT, the technical research center of Finland, with research experts. We can give them a call and have a chat about the technical challenges. And we also are building a technical advisory board where we are planning to have key opinion leaders, professors from different universities. That’s how we assess the IP.
But I said the IP is not that the most important, of course, it needs to be in place, and we also have a roadmap of how to create new IP on top of the current patent applications, usually they are not granted at the point when we make an investment. For us, the most challenging part is that it’s quite often it’s technical innovation and solution looking for a problem.
They have come up with a great solution, but they don’t know if there’s a customer that has a problem to be solved by this – so-called product-market fit. The other area where we need to put the most effort is team building, most of the team originally is from research organizations. So, we need to strengthen the team diversity with product development, and commercialization and CEO with entrepreneur experience.
Tuomo: When you decide to invest in these startups, is it a requirement that they already have other skills than just technical skills and researchers? or is the assumption that you will take care of that?
Mikko:
It can be both. In many cases, we have just agreed that we need to hire these guys, you know, key recruitments, and there will be a significant kind of option pool or shares allocated to the new team members. But in some cases, we have done that there being a pre-requirement for us to make an initial investment decision — before we actually give them money, there needs to be hiring of the CEO. But that’s not that typical.
Tuomo: Did you put any weights on an extended team, like, what kind of advisors this founder might have, or board members?
Mikko:
I hate to see that, but in most of the presentations we see there’s a lot of faces, and then when we dig in deeper — we asked, which are the full-time members? There might be 10 faces, but then there are only three people that are committed to working full time. So, we put much more emphasis on the full-time team.
With that said, I think what we have leveraged is the global advisors, we have now gotten some high caliber advisors to the board, or to the advisory role, and they’ve also invested their own money into the company, it’s a very good kind of win-win, because we know that they are going to perform and help the company.
Jessie: When we have the right people and network, then other values follow them, such as the product-market fit that you mentioned, when we have the right persons in place, and they might be able to help with this product-market fit risk. How do deep tech startups overcome the risk of product-market fit along the growth journey?
Mikko:
To find the product-market fit they need the “startup fail fast” mentality, which is something that the scientists are not used to. They are trying to develop internally a perfect solution that needs to be very accurate and precise and work in all conditions. But what we ask them to do is to make a minimum viable product and present it to the customers and potential customers. You know, do some demo test kits, send them out, try to get feedback from the customers, let them play around with the technology as soon as possible. That’s the fastest way to find the product-market fit.
Tuomo:
Many deep tech companies that we have on the platform, I would say 90%, are mainly actually looking for commercial skills, like skills to productize their offering, to commercialize their innovation. Typically, they have very good domain expertise, because they are typically researchers, they know that they know the domain very well.
Jessie: I guess it’s helpful for them to get a few brain dates like today’s meeting with potential partners, right?
Mikko:
Yes.
One thing that we would challenge them is to think globally and meet with international customers early on. Because quite often they are looking for local Finnish small players and they are accustomed to meeting them and developing something with them. But I think it makes sense to expand and try to actually touch base with the largest and global leaders early on and see what the largest challenges for them are, and what problem they could try to solve with their solution.
Global ambition level, it’s something that we need to stress. Many teams are only looking in the Nordic field, it’s not big enough for us. deep tech is global, the market is huge.
Jessie: In general, a big company’s engagement with startups, or open innovation, is very, very selective. So how can startups get the chance to talk to big companies early and try to build some POC earlier?
Hani:
The GameChanger program (an open innovation program that the oil & gas giant Shell works with startups) was set up, you know, as I mentioned, with a design of open innovation right from the get-go. And it was set up to act as a venture studio, which means there’s an incubation period, there’s a curation period. When I worked there, I really viewed my role as the advisor, translator, mentor, all at once. Part of the curation is not just vetting the idea, but also, you know, pairing it with internal resources. We would, in Game Changer, make a non-diluted investment in the idea. So typically, the hundreds of thousands, sometimes up to a million dollars.
But the bigger investment is in the time and expertise that you bring. And sometimes even more so in the connections you make. For example, the last company that I mentioned, Hyper Sciences, which I’m an advisor for right now, part of my role was to set them up with the right sets of internal resources that they need for execution as well as industry advisors that will help them along the way. Otherwise, it stays as a small niche idea. So that’s part of the role of a venture studio or a corporate innovation program, not just to give money out.
How do we source the ideas? GameChanger did that either by you know, you just go to the website, submit an idea, but of course, it must be screened, right? For fit and other things. Occasionally they will do open calls in specific areas.
In fact, in GameChanger program, we had four simple criteria, we kept them simple on purpose so that they can be adaptive to the different times.
One was novelty, what is novel, and one metric of novelty is patents you may have filed. That’s one metric of novelty. But we spent a lot of time looking at how different is this idea? Okay.
The second was value. Ultimately, the early-stage technology, whether it’s hard tech or otherwise, it’s an odds business, okay, and anybody who’s played in the angel or VC investment understands that, no matter how much due diligence you do, there is still a statistical component to it, because there are so many unknowns that are subject to the changing environment and everything else that you cannot control. Because of that, you must be able to screen more ideas, and you’re able to execute. So, by the time you de-risk it, and really dig it down by the possibilities of success, the value is still worthwhile. In other words, if you start with a niche of a niche of a niche, very likely going to end up with a small thing.
And then the third one was what we called generic durability, part of that durability was a definition of proof of concept, more than an idea you’re looking for. [We ask:] This is an interesting idea, what are you proposing to do? And how do you propose to do it, and this is something we work together with them intensely on. That was part of my role — as a translator, as an advisor, a proponent, all of that combined — it’s somebody who’s actually translating the needs of the customer, to the innovator, and vice versa, trying to translate in simple terms that real users can understand what is this thing about. You know, a lot of innovators really fall in love with that idea for a good reason, they’re passionate about it, and we like that, but you want to make sure that you’re able to translate what the value is.
From proof of fundamental concept (feasibility) to proof of value (desirability), designing a minimal viable product, you have to be able to demonstrate a meaningful pathway between that minimum viable product and a scalable business, if you can show me that target audience is replicable across a multitude of countries or locations or sectors, then I’m interested.
The last metric was the fit to Shell. You know, it was something essential to what the organization cared about.
Jessie: When deep tech startups enter a new market, what resources are needed to grow? What is your advice for them?
Tuomo:
It really depends on the situation where the company is. We have been searching for advisors to help with market entry, like opening doors to certain entities within the new market. Also, what we have been doing is searching for people who take broader ownership of the market entry, who is well connected within the country, and who know what a suitable distribution strategy could be, or a marketing strategy, and, help with those. So, you can really use advisors for quite a wide variety of situations.
We’re good in helping find people who have gone a similar path earlier, for example, someone who has run a startup in the medical field and has acquired funding for the startup — meaning that this person has the knowledge of what to do to make the company attractive in the eyes of the investors, also, it’s likely he has connections to potential investors.
Jessie: What are the deep tech innovation domains most exciting to you in the next 5 years?
Hani:
I’m very interested in health tech, I think it’s a new FinTech, I think it’s important because you have an aging population, the world is aging, and so the need to cater for that aging, you know, we really need more of innovations in health tech. And energy transition, and, a lot of countries are making a lot of commitments, by the middle of the century to wean off fossil fuels, but it will require a lot of money, a lot of infrastructures, and a lot of technology developments. So, a lot of hard tech investments must come from governments, and the private sector, and the customers will have to pay as well. These are the two areas.
Mikko:
Almost half of our investment has so far been in the health tech sector. There are a couple of process innovations relating to food tech. And let’s say cleantech. Resource scarcity is a problem with the agriculture of producing protein, soy protein needs to be replaced. So, we have energy. For example, using fungus to produce protein for fish feed, to replace soybean protein. We have solar foods; it’s trying to use a microbe to feed microbes with solar energy and getting the CO2 from the air to produce protein supplements for humans. We also have fungus to produce milk and egg protein replacements without any animals.
Recycling of clothes, how to make that work to replace cotton? We have a company called Infinited Fiber, for example, that has great technology for this kind of recycled materials, and also wood-based materials for replacing cotton in the clothing business.
And then I would say the CO2 emissions relating to construction. We have a couple of companies trying to find a very ecological process to make the concrete maybe CO2 negative — to insert the CO2 into the concrete. And we’ve done a hydrogen study. Hydrogen is something that might be growing in the future as an energy source, but there are not that many startups now in the Nordics that we have found. And quantum computing is something that we are very interested in (maybe less related to the hardware, but more to the software and algorithm).
Usually, companies build up capabilities through co-development with early adopters in one market, to scale up their business they need to use their core capabilities in a scalable model. In a new market, they need to identify the market demands, new product-market fits (PMF), and even new business models, also, build new teams/partners, integrate themselves into new ecosystems, and even rethink branding. This is what our US/Asia Launchpad program addresses. Finding PMF won’t be a single shot, it’ll take a journey with a networked approach.