Helping VCs Understand Your Technology

The word to the wise in venture fundraising is do not spend too much time on the technology. While true, there is a balance to be struck in this.

Startups that earn venture backing are going after big unmet opportunities with a scalable solution. That often means many venture-backed startups have underlying technology that is the foundation of their value proposition and competitive advantage. 

To be clear, when you are fundraising, it is essential to focus on telling the story of the business opportunity. Because technology-based startups regularly have technologist-cofounders, much has been written to remind fundraising entrepreneurs to avoid making the mistake of focusing too much of their pitch on the technology. I agree with that advice – and this blog post does not recommend that your pitch has a heavy focus on the underlying technology.

For the first meeting with an investor, a high-level overview of the technology and how it enables achieving the business objectives is likely more than sufficient. At that stage, the investors are trying to determine if the business is potentially exciting and aligned with their investment objectives. Typically, for a first meeting, they assume that the technology works as advertised and try to discern the nature of the unmet need, the novelty of the solution, the market potential, and the team’s capabilities. Often this  continues in follow-up conversations.

If an opportunity passes an investor’s initial hurdles, and they decide to dig deeper, the technology will come under more in-depth scrutiny.  That means that to raise capital for a technology-based business, you will need to find an effective way to help your potential investors understand the technology.  This can be quite challenging since the technology will often be novel, and the investors will usually not have deep technical skills in the space.  

To get your prospective investor onboard, you will need to be able to succinctly explain how your technology works and what makes it novel in terms they can understand well enough to explain it to other investors. 

Following success at that level of explanation, if the investor remains intrigued enough and the technology is complex and essential to the business’s success, the investors may decide to hire one or more technical consultants to review (read poke holes in) your technology and intellectual property. For novel technologies, I have repeatedly found myself in the position that the deepest expertise in the startup’s technology lies in the startup itself. Therefore, often there are no great, relevant, independent technical consultants available to the investors. The technical consultants you have to convince may very well come from the perspective of some competing or tangentially-related technical field and may be less than well-equipped to understand your innovation.  Yet treating them with respect and taking the time to educate them in a graceful way will likely prove pivotal to the report they give back to the investors who hired them.

As a businessperson leading venture-backed technology-based startups, I have faced this challenge multiple times – and learned something from each path.  Here are some due diligence stories to illustrate some of my experiences educating investors regarding innovative technologies:

• Accuri Cytometers were a design breakthrough that provided excellent performance and exceptional ease of installation and use for a fraction of the cost of similarly equipped competing scientific instruments. The product development was accomplished by a team of engineers who had never worked on a flow cytometer before. Convincing investors that a team with no flow cytometry domain experience had accomplished something others in the space had failed at was a challenge.  VC investors repeatedly asked us to submit to technical reviews by technologists from either the failed predecessor startup (whose technology was vastly different) or the big flow cytometry players whose technical rules we were breaking. To do this, we developed a slide deck that showed how our five interlocking novel innovations were connected to the core functions of a flow cytometer. We used analogies to explain why these novel approaches were both technically logical and, when added together, could accomplish a better, faster, cheaper innovative triumph. We became conversant in our competitors’ technical approaches and adept at respectfully highlighting the differences of our approach while still conveying respect for the products that the technical consultants we were presenting to had worked hard on. Sometimes we also had different engineering leadership members explain our innovations to subtly emphasize the idea that our success resulted from multiple innovations. We showed side-by-side, same sample comparative results to demonstrate inarguable performance.
  
  
• Accio Energy developed utility-scale turbine-free offshore wind power technology. When we finally decided to abandon the project, the U.S. Department of Energy asked us to extensively document our work because it was the most advanced work in the field ever done anywhere. A team of physicists and engineers had worked for years to develop and scale up the technology while striving to make it practical and cost-effective. To help investors understand the technology (microdroplets, wind, and high voltage electric fields), we invested first in developing an incredibly complex PowerPoint animation that ultimately evolved into a sophisticated explainer video that used realistic animation to illustrate the principles of practically invisible technology. We used analogies like the physics of lightning to help the underlying physics seem plausible (we are just scaling down what nature does on a massive scale). We wrote detailed technical white papers and developed several demo tools, such as using our prototypes to light a series of light bulbs to help connect the dots for potential investors. One of my lessons learned from Accio is how hard it can be to raise money for technologies that are not intuitively easy to explain. While we did have some success, I now look at how intuitive the technical story is when evaluating potential startup ideas. It is hard to fundraise for complex and challenging-to-explain technologies.
  
  
• Fifth Eye was founded to commercialize a supervised machine-learning trained algorithm that leverages the nuances of an electrocardiogram (ECG) waveform to identify signs of hemodynamic instability in hospitalized patients. The conviction to form the company came from describing the technology to the clinicians who immediately understood this novel technical tool’s potential to add a new dimension to critical care. Extensive customer discovery interview notes outlined the applications and potential impact of the technology. Case studies, clinical data, and white papers were all tools we developed to help investors understand at an abstract level how the algorithm worked while maintaining the confidentiality of the intellectual property. We invested in building these tools to equip our lead VC champions for two separate rounds. These VCs were not software or artificial intelligence experts. Yet, we needed them to effectively explain the technology to other investors both in their partnerships and syndicate partners. Their ability to describe the technology built the confidence we needed to secure the funds to develop a regulated Class II software-as-a-medical-device, navigate the complexities of the FDA clearance process, and market the product. It is not only the team who needs to be able to understand and explain the technology. Investors, potential customers, and other champions need to be able to do it as well. 

By answering technical questions in an accessible way, finding useful analogies and demonstrations to equip non-technical people to sell to others, and connecting your innovations to how you plan to change the world, you can make a compelling case to both potential investors and customers.  While it is not your first story, it is often a critical piece of building a successful technology-based startup.

Special thanks to Prem Bodagala for suggesting this post.