Written by me for Contrary Capital.
The Founder’s Guide to Deeptech Funding
Venture capital started with research-oriented hard-tech companies such as Intel. Of course the venture ecosystem has flourished since then, and most deals these days aren't driven by R&D innovations.
Today, “deeptech” entails the hard sciences and advanced technologies among any number of the following fields:
These startups are not making the next viral social media app or CRM software— those with normal KPIs. Instead, they’re creating ingenious, sometimes radically-impactful, solutions to previously unsolvable problems— everything from environmental concerns to mind-controlled machines (yes, I’m serious). Therefore, out of the complex, research-driven nature of deeptech fields arises a need for unique fundraising sources. Thus, the team at Contrary Capital wanted to make a quick guide on how to fund your deeptech idea.
Non-dilutive funding methods
Non-dilutive funding is about gaining capital without the founder losing equity in their company. It can range from government grant money to bank loans, as opposed to angel investing and venture capital. The former ensures that founders do not lose any % of ownership, while the latter is an exchange of capital for equity. The following is a list of non-dilutive funding sources by R&D credit firm Hull & Knarr:
- Loans generally require a credit check, collateral, and guarantors. And they must be paid back with interest.
- Grants, on the other hand, do not need to be repaid. There are several different types of grants for small businesses and start-ups. Usually, they require the submission of an application and, most of the time, 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 many others. SBIRs/STTRs are a great way for businesses to work out the kinks of their technology and products before reaching full commercialization.
- Licensing is a good way 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.
- Tax Credits offset past, current, or future tax a business generates. They can be refundable or non-refundable, meaning that the business receives them even if there was no tax generated (refundable) or only if the tax was owed (non-refundable).
Non-dilutive funding is essential for any founder, deeptech or otherwise. That said, the following are three resources for non-dilutive funding that are geared towards R&D-heavy projects and ventures.
To sustain deeptech and research-driven ideas, the Small Business Administration (SBA) created the Small Business Innovation Research program (SBIR), which is a grant to incentivize small businesses to “explore their technological potential” and “profit from its commercialization.” The mission is to stimulate technological innovation and meet federal R&D needs. Eleven federal agencies participate:
- Department of Agriculture
- Department of Commerce - National Institute of Standards and Technology
- Department of Commerce - National Oceanic and Atmospheric Administration
- Department of Defense
- Department of Education
- Department of Energy
- Department of Health and Human Services
- Department of Homeland Security
- Department of Transportation
- Environmental Protection Agency
- National Aeronautics and Space Administration
- National Science Foundation
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 into a competitive selection process. The proposal for applying entails a business plan, executive summary, cost proposal, and technical proposal. Furthermore, eligibility requirements include a couple of factors— the most important being that the awardee must qualify as a Small Business Concern (SBC) as defined by SBA regulations at 13 C.F.R. §§ 701-705. 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. In summary, applicants must qualify as an SBC at the time of the award and at any time after. The applicant must perform ⅓ of the research or analytical effort in Phase I and ½ of the research or analytical effort in Phase II. A qualified SBIR manager must approve any deviations or changes in the research. Also, the applicant’s primary employment must be at that SBC throughout the entire proposed project. Applicants must perform their R&D within the USA.
Then, applicants must register in the SBA’s Company Registry Database and submit a Proof of Registration. Next, 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 must submit a proposal for Phase I funding. This proposal varies by Agency, but typically includes a business plan, executive summary, cost proposal, and technical proposal. For Phase II funding, applicants must construct a commercialization plan with information about the company, customer and competition, market, intellectual property, financing, and assistance and mentoring. Finally, the selection process begins with grant deadlines and funding schedules varying by Agency.
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. These grants are for small businesses, startups, and non-profits who do not necessarily have formal partnerships with research institutions or institutions with technology transfer offices.
Note 1: Technology transfer offices are organizations within universities and research institutions that protect the IP of research, discoveries, and products made within the respective establishment— no matter who is funding the project.
Note 2: The SBA also has Small Business Technology Transfer (STTR) grants, which are grants with two significant distinctions from SBIR grants. For one, STTR projects require small businesses or startups to team up with a non-profit research institution (universities or federal labs). For two, 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/.
The National Science Foundation (NSF) has grants for fields within science and engineering, including
- Biological sciences
- Computer and information science and engineering
- Crosscutting and NSF-wide (multidisciplinary)
- Education and human resources
- Environmental research and education
- Integrative activities
- International science and engineering
- Mathematical and physical sciences
- Social, behavioral, and economic sciences
The NSF caters towards a broad range of people, ranging from K-12 schools to colleges, universities, businesses, non-profits, and research organizations. 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. The entire NSF grant timeline goes as follows.
Phase I - Proposal Preparation and Submission
- NSF announces funding opportunity
- Organization prepares/submits proposal (part 1 and part 2) *
- NSF receivess proposal
Phase II - Proposal Review and Processing (about 6 months)
- Cognizant program officer receives proposal and selects peer reviewers
- Peer reviewers review proposal
- Program officer analyzes input and makes recommendation to Division Director
- Division Director review of recommendation
Phase III - Award Processing
- Grants and Agreements Officer conducts business review
- Grants and Agreements Officer notifies organization of award decision
*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 founders must use their discretion to apply on time.
All in all, NSF grants are here to keep America at the forefront of scientific breakthroughs. They fund traditional research and those with high-risk, high-reward ideas. There are grants for everyone from high schoolers to post-doctorates, and from non-profits to research institutions. Furthermore, some incredibly successful companies that were born from NSF grants, such as Symantec, Qualcomm, and IntraLase. Many of these companies go on to subsequently raise VC money.
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,” and is also known as the NSF SBIR/STTR Program (the previously mentioned SBIR and STTR program is under the SBA). 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. That said, 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. We highly recommend undergraduate deeptech founders consider NSF grants as a means of non-dilutive funding.
Established in 2011, I-Corps is an initiative created by the NSF to aid in the commercialization process for deeptech companies and those that they previously granted funding. The program offers a curriculum-based, experiential learning opportunity, in cohorts by season, 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:
- Bay Area Regional I-Corps Node (BA)
- DC/MD/VA Regional I-Corps Node (DMV)
- I-Corps South Node (SOUTH)
- Innovation Node-Los Angeles (IN-LA)
- Midwest I-Corps Node (MWIN)
- New England Regional Innovation Node (NE I-Corps)
- New York City Regional Innovation Node (NYCRIN)
- Southwest Innovation Corps (SWI-Corps)
- UNY I-Corps Node (UNY)
In terms of applying 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. The program seeks to boost deeptech ventures that are ready to test the waters of a commercial marketplace, regardless of industry. As for numbers, 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, which are typically deeptech ones, with nearly $301mm in follow-on funding raised and 6 acquisitions (Venture Well and I-Corps).
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.
- Independent foundations
- Singularity University
- Chan-Zuckerberg Initiative
- Schmidt Futures
- University pitch competitions
- Hello Tomorrow
Dilutive funding is when a startup raises capital in exchange for equity and is commonly attributed to venture capital (VC) funding and angel investing. It’s an important tool for deeptech founders because, as opposed to grants and other non-dilutive funding, dilutive funding comes with greater visibility into the deeptech ecosystem. Sure, it comes at a price, but dilutive funding has additional benefits that can position the deeptech startup for success. For example, broader networks, more press/promotion, and access to diverse advisors.
According to Different Funds, a fund-of-funds-structured portfolio management firm, 11 of the most active deeptech VC firms are as follows. These firms have experience investing in a myriad of industries. Some are thesis-driven, others are industry-specific, and others are agnostic in general.
- Lux Capital
- Bessemer Venture Partners
- Breakthrough Energy Ventures
- Data Collective VC
- Eclipse VC
- Energy Impact Partners
- Founders Fund
- Insight Venture Partners
- Khosla Ventures
- Playground Global
Each VC firm has specific preferences and requirements on how they go about the funding process (as any VC firm does, regardless of deeptech or not) That said, the biggest factor for deeptech investors is simply: does it work? Is the project able to be monetized or is it just pure research? The best strategy to have is to simplify your startup as much as possible and make the investor’s funding decision as seamless as you can. Remember the key distinctions about deeptech: it’s complex, it’s capital intensive, and it’s research-heavy. Easing investor concerns within those areas will give a higher probability of funding. On top of those factors, founders must also appeal to investors in the typical ways that any startup should. For example, investors favor founders with previous operating experience and those that have met tangible KPIs. That said, deeptech founders do not need to hit venture scale for their startups necessarily. The potential for hitting hyper-growth must be evident, but being in it is not always a necessity.
To reiterate, a partner at SOSV, another powerful deeptech fund, laid out common deeptech investing risks. With this, we recommend that founders disprove these risks.
- 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?