Summary: The Deeptech Seed Fund Scorecard, when used by a university incubator that has a good customer discovery process, finally makes it possible/efficient for investors to determine which spinouts are worthy of further due diligence. It is free to use by anyone.
The spin-out stage investment problem
Very very few private-sector institutional investors will engage with university-spinout-stage ventures. This is because:
- It is impossible to determine which ones are sufficiently promising to justify the substantial effort required to get these deals from pre-spinout to spinout and close and
- It is a lot easier to wait until later when they are further commercially and technically de-risked. In particular it is easier to wait for solid metrics like customer revenue and growth rate.
This makes it really hard for spinout-stage founders (who have no solid metrics) to raise funding, other than from angels, grants, friends and family – if even that.
½ the solution – lean startup incubators
This problem is somewhat solved with the advent of pre-spinout incubators inspired or designed by the lean startup people, e.g. the NSF I-Corps programme in the US or the very similar and excellent Innovate UK ICURe programme. These programmes force the potential university entrepreneur to have at least 100 conversations with potential customers/stakeholders to determine whether anyone is likely to ever want to do business with them and therefore whether or not it is worth proceeding to create the spinout. The really promising potential spinouts have the potential customers clamouring to do business with them.
The other ½ – the scorecard
At Deeptech Seed Fund, our investment thesis requires us to seek out commercially promising spin-out stage ventures, and we struggled to find any. The lean startup incubators generate really useful signal as to interest-level within the market but they did not push the ventures to secure any level of commitment from the interested customers. When we did due diligence we mostly determined that the apparent signal was just noise.
So – we devised the scorecard to allow the ventures to present reliable pre-revenue metrics as to the commitment level that they have been able to secure during their one hundred conversations. At the prompting of Innovate UK we also required the ventures to present a simple cap table – recognising that (surprisingly) failure to agree a cap table is the biggest cause of failure for UK startups.
This article and its associated videos goes into more detail about the scorecard and how it works.
Scorecard – story so far
We first piloted the scorecard with ICURe in North by NorthWest and learned various lessons, notably that ventures needed a further six week mini-programme to work on converting interest to commitment so that they could present this commitment in the scorecard. The experience, then and since, has been that this exercise immediately highlights the extremes i.e. the weakest and strongest prospective spinouts. It provides non-subjective evidence of demand which is not enough for an investor to write a cheque but is plenty to tell an investor that certain of these spinouts merit their attention and due diligence.
After success at North by Northwest and the great work of the team from The Helix Way and QUBIS Ltd Innovate UK adopted the scorecard nationally and made it a prerequisite for applying for their £300,000 ICURe Exploit Funding.
The scorecard has also been adopted by the pan-European Deeptech Founders programme and is being piloted in several other national and local programmes in the UK, US , Belgium and Sweden.
Investor engagement
Now we are seeking to form an investor working group that will provide a wider investor view as to what should be captured in the scorecard. The objective is on the one hand to ensure that programmes that are using the scorecard can better attract investors to their ventures and for investors the objective is to have those programmes do more of their due-diligence.
Channel tunnel
The brave French and British engineers dug the channel tunnel from both sides simultaneously and met in the middle. Today the majority of university spinout programmes are digging a tunnel in the direction that they think is useful but which does not lead to any investors. We’re aiming to have some investors start digging from the investor side and aiming to ensure that somewhere in the middle they will meet the incubators using the scorecard – who have been guided by those investors as to the direction of their dig.
If you’re an investor focussed on early-stage deeptech then get in touch.
This post was originally posted on LinkedIn by Pearse Coyle. You can view the original post here and follow Pearse on LinkedIn here