As a venture capital (VC) fund, we at TandemLaunch see ourselves primarily as investors in people and technology. Our foundry approach to company creation, however, requires a different approach to opportunity evaluation. Where a more traditional VC fund is given a configuration of technology, talent and business strategy to evaluate as a whole, we must find a way to evaluate potential configurations of these aspects before they exist. How we do this will be the subject of this series of articles.
Vohora, Wright and Lockett1 describe five critical stages for a successful university spin-off:
- Research opportunity evaluation
- Opportunity framing
- Entrepreneurial commitment
- Threshold of credibility
- Threshold of sustainability
At TandemLaunch, the first two stages of this process occur before our entrepreneurs enter the building, and our experience mirrors the findings of Vohora et al in that there is a strong feedback loop that exists between these two stages which must be nurtured to converge at a point where an investment feels viable.
It takes an ecosystem
“A solution looking for a problem” is a common criticism levelled at technical entrepreneurs bringing new inventions into the market, and a pitfall that is all too real when operating at the ‘zeroth-stage’ of venture investment – investing before a company exists.
The act of evaluating opportunities at TandemLaunch is a process of venture ideation involving the generation of hypothetical businesses. Depending on the technology, this “design space” can be unreasonably large, and so any deep-tech investor needs to approach this process with an investment thesis that can carve down the potential paths while simultaneously mitigating investment risk. For TandemLaunch, we can summarize that thesis as:
- The business requires entry to a market that is rapidly adopting, unregulated and for which we have strong methods for industry validation. In practice, this has usually translated to the consumer technology market.
- The business needs to develop a Minimum Viable Product (MVP) within six months and be capable of garnering market traction for the remaining investment runway.
- The business needs to have multiple potential markets sharing the same technological problem to mitigate market risk through optionality.
Knowing what we’re looking for is only half the battle though, because it turns out that validating whether these statements are true is impossible without having an ecosystem of academic and industry institutions to turn to for answers. Where our industry partners can confirm the need that a given technology proports to solve, our academic network allows us to put in perspective the scientific challenges between the current stage of a technology, and what it needs to become. Thus due diligence for deep-tech companies is both an internal and external collaborative affair that feeds back into the ideation process to refine the investment to the point where we believe it’s ready to put in front of our entrepreneurs (the development and navigation of ecosystems is a fundamental pillar of deep-tech commercialization and BCG’s 2019 report on Deep Tech Ecosystems has an excellent overview on the subject).
You can’t validate a technology without a narrative
Unfortunately, it’s not enough to place a technology in front of academic or industry partners and simply ask if it’s of any use. A technology cannot be valued unless it’s put in context. An informational structure is needed that can act simultaneously as a scaffolding to ideate on as well as a means of communicating both internally and externally for validation. It turns out that the most effective manner we’ve found to do this is something very familiar to the experienced entrepreneur: we need to build narratives.
There are mountains of resources on the importance and use of narratives, so I won’t delve too deeply into the fundamentals here except to quote Hariri in his book, Sapiens, “Homo sapiens is a storytelling animal that thinks in stories rather than in numbers or graphs, and believes that the universe itself works like a story, replete with heroes and villains, conflicts and resolutions, climaxes and happy endings.”
Company narratives work very similarly to personal narratives in that they create a coherent framework to understand a complex set of facts and predictions. When constructed correctly, narratives allow startups to leverage their existing capital and assets to acquire additional resources2 – whether it’s money from investors, new talent or new partners and customers. So if we can encapsulate the value of a business with a narrative, then we can measure the value of a technology to a business by its contribution to the narrative. In short, at TandemLaunch, narratives are a method of ideating potential businesses and assessing the impact of a technology to those businesses before they exist.
Developing a narrative from an invention
To serve us, a narrative needs to accomplish four things:
- Tie the technology to markets that we understand and can validate
- Articulate a business that we can view through our lens as investors
- Elaborate on strategies that will mitigate risk
- Illustrate a target from which we can develop R&D, talent acquisition and market entry roadmaps
I’ll elaborate on each of these steps over the course of this series.
Tie the technology to markets we can understand and validate
The process of developing an investible narrative differs depending on the starting materials you have in hand. In most cases, an entrepreneur identifies a market need and pulls together the necessary technology to accomplish it. This makes this first step of narrative generation pretty trivial, however, another approach often also appears as a consequence of our deep-tech focus. That is, we often find ourselves with an invention in hand asking ourselves, “What kind of business can we build with this?”. This is an inherently risky position to be in – one that technology transfer offices (TTOs) at universities find themselves in all the time – because it is all too easy to fall into the trap of over-valuing a business on the uniqueness of the invention (rather than the value of the market need that it is actually capable of addressing). So how do we develop a narrative without falling into this trap?
- Identify the technological problem being solved by the invention.
We define the technological problem here differently from the market problem/need. The technological problem exists independently of a market. For our portfolio company Soundskrit, the technological problem they solve is how to obtain a plenacoustic function (a soundfield) with a single sensor package.
- Identify how the technological problem manifests itself in commercial applications.
In Soundskrit’s case, it was clear to us that the growth of speech recognition applications would create a demand for solutions that could isolate a speaker of interest from the noise (or other speakers). The technological challenge of this need is separating and localizing multiple sounds in real-world environments.
In some markets, like smart speakers, there are incumbent solutions to this challenge. Namely, microphone arrays. Systems large enough to fit a microphone array of sufficient complexity have, therefore, been able to provide rather advanced speaker isolation capability. However, these systems are still limited in their ability to localize sound sources accurately in 3-dimensions and suffer from poor frequency response curves at low frequencies.
In other markets like mobile, a very weak form of beam forming is used, which prevents even the features on smart speakers from being implemented to any useful degree. Mobile devices simply can’t provide the necessary real estate to deploy an array,
In this manner, you identify the value of the technological problem – by seeing how it manifests in each market and to what extent incumbent solutions have addressed it. The value of the problem is then the gap left by the incumbents. If this evaluation feels like a potentially unending endeavor, that’s because it is. It has helped us to have an industry focused investment thesis because it provides us an anchor from which to search for market needs (and a network with which to validate that these needs are real).
- Determine where the invention outperforms and underperforms against the incumbent solution.
If there is an incumbent solution to the market needs you’ve identified, the next step is to identify along which axes your invention will outperform the incumbent, and along which axes it will not. If you’re lucky, the invention outperforms the incumbent on every axis. If not, all hope isn’t lost, because the manner in which your invention outperforms might position it to provide a solution to an underserved but valuable category of customer in that industry.
To return to Soundskrit, the mobile market is one where Soundskrit’s technology outcompetes incumbents on virtually every axis, bringing the capabilities of microphone arrays in a package small enough for mobile devices. The impact this technology could bring to mobile was a large contributor to our valuation of this ingenious idea out of the lab of Prof. Ron Miles at Binghamton University.
- For aspects where the invention underperforms (or is incapable of delivering due to market requirements), determine whether a reasonable R&D trajectory can help you cross the gap.
This is a critical step, researchers typically reach a stage of demonstration that validates the scientific novelty of their findings, what they have achieved to date is rarely a demonstration of what could be achieved if a company focused their capital towards R&D. An academic network is critical for this analysis (unless you have people with the required depth of technical knowledge in house).
- Repeat Steps 2, 3 and 4 until you’re out of markets.
One characteristic of deep-tech commercialization is that your company is taking on an inordinate amount of technological risk. For this reason, it’s worth mitigating market risk by focusing on large and valuable market needs and also identifying multiple markets to enter. While focus becomes essential post product-market fit, the first years of a deep-tech startup are often spent finding a form of technology-market fit. Having multiple target markets to test in this early period is essential – and for those products that fit into a supply chain that serves multiple markets, you might end up undervaluing your invention if you stop after your first findings. For instance, Soundskrit’s microphone package is well positioned for virtually any instance where sound localization and sound source separation are desirable in a tiny package (Home hubs, IoT, Mobile, Robotics,…).
Once you’ve exhausted this first step, we’re ready to start telling stories. Stay tuned for Part 2 where we’ll cover story generation for the purpose of assessing an investment.
 Vohora, A., Wright, M. and Lockett, A. (2004) ‘Critical junctures in the development of university high-tech spinout companies’, Research Policy, 33(1), pp. 147–175. doi: 10.1016/S0048-7333(03)00107-0.
 Martens, M. L., Jennings, J. E. and Jennings, P. D. (2007) ‘Do the Stories They Tell Get Them the Money They Need? The Role of Entrepreneurial Narratives in Resource Acquisition’, The Academy of Management Journal, 50(5), pp. 1107–1132. doi: 10.2307/20159915.