Why Angel investors are the right choice for deep tech startups

Startups are often characterized by building fast and growing faster. People take pride in building the first version in just days. But deep tech is an exception. The big difference with deep tech is that often the first product is expensive to build and takes many years to launch. Since deep tech startups require significant funding over an extended period of time, they require investors who are less risk-averse and willing to wait longer to generate returns. For the deep tech ecosystem to grow, initial funding is critical. The investors need to be able to back these young and bold start-ups until the breakthrough of the technologies they are building to tackle new-age problems.

Venture investors manage a fund pooled together by multiple business associates or limited partners and have a 5 year return policy where they need to show results. Since these investors need to raise another round, they try to drive as large a return as possible for their associated partners in the shortest possible time which often leads to investors advising/forcing companies to do things that show immediate results and essentially defocussing them. This clearly is not possible for deep tech startups to provide as the technology being produced itself takes a lot of time and trials in getting recognized by the industry and government standards.

Angels generally draw from their own bank account, so they’re typically not accountable to anybody else and hence are suitable options for such startups. A very good example of this is Tesla. Elon Musk joined Tesla as an investor first in 2004. He then went to acquire the post of CEO in 2008 after deciding to invest more of his personal fortune into the company.

Angel investors and venture capital funds focus on businesses in different life cycles. Business angels and family offices fill the ‘gap’ between friends and family and venture capital. They typically invest in early-stage business and startups, which also means that they face a higher risk than venture capitalists. Angels being passionate investors want to see the innovation happening. The latter on the other hand are pure financial investors who are less interested in early-stage businesses and prefer more established businesses.

Angel investors typically bring years of expertise to the table of a start up and they already understand the ropes it’ll take to bring success to a business. Scientists from the Harvard Business School discovered that ventures backed by angel investors are more likely to remain in business longer, have substantial growth, and witness a greater rate of return.

With a lot of deep tech startups, the technology is often unproven and not productized. The complexity of the underlying technology, as well as the time involved in the development, makes the challenges faced in the deep tech space quite unique. The crucial one among these is funding; along with building IP assets, gathering insights on the target audience, reaching the relevant audience, and building accurate predictive models. Thus a lot of funds are required initially.

Once you actually launch, you need much less capital and there is less competition as you build the technology that is available in the market at 100x the price and thus the profit margins are also high which basically eliminates the need for investments from Venture capitalists.

By Madhvi Chaudhary, PR Manager, Media Mic