Scientist asks a VC: What level of evidence is required when discussing market size or value?

Welcome to a new part of a Venture Capital Primer for Scientists series based on hundreds of workshops I have given during my work as a deep tech VC at Main Sequence.

When I was asked this question, I was given the following clarification:

“I’m keen to learn what the VC equivalent of a double blind RCT published in the Lancet is.”

If you are a scientist, you will understand the reference.

For my answer, I am going to consider the most common stage when I am asked. It is usually very early, before a company has spun out of a university or research organisation. The founders have some technology that they think could be a company and they have likely taken it through a commercialisation program or accelerator.

The big question: “What do I have to believe?”

I ask myself what I need to believe to be convinced that your startup:

• CAN be valuable?
• WILL be valuable because of your plan to get it there?

It is all potential. That is all we can measure at this stage.

Here are some areas of interest:

#1: How do potential customers respond?

When the product is ready, will customers want it?

• How many potential customers have you spoken to and how many have indicated they would use your product if it existed? Which customers did you select? As a sample, do they prove to investors that this startup has a market?
• Has anything changed in your plans because of these interactions? This is strong signal because it means customers care enough to give feedback on specific requirements and because it shows that the business learns from the market.
• Is anyone already trialling your product?
• Do you have any pre-sales? It is possible to get letters of intent from customers stating that, given certain milestones, they intend to become a customer. This also has the benefit of putting the customer in a buying posture rather than just answering a survey. This can yield different responses.
• Do you have ‘proof revenue’? This is revenue that you make because a customer is paying you to collaborate with them. It shows that the customer values the potential of your startup enough to commit $.

#2: Is ‘unit proof’ emerging in the company metrics?

Do you know your unit economics and is there proof that they are moving in the right direction.

• e.g. if your company needs to deliver a certain cost of goods, how is the work tracking towards it?
• e.g. if you are asking customers to change their behaviour, can you show that specific work of the company has caused adoption?

#3: Are the commercial aspects of the technology on the right trajectory?

An R&D project in a university might take a ‘platform approach’ and show that the science can be applied across a vast array of use cases. An invention will likely have many components to it, but only some of them are critical to the commercial success of the company.

Show those properties emerging quickly at the start.

If your pitch deck says “We will be the first company to deliver X at a cost that the market will accept” then show that specific work in the lab is driving down the COGS consistently.

If your pitch deck says “We increase the performance of X …” then show that performance increasing over time.

Because we are showing potential in these early stages, the progress over time is as important as the milestones you are hitting.

#4: Has the science been accepted by experts in the field?

If there is science at the heart of a startup then peer reviewed papers are as important as they can be in academia.

Investors will have varying degrees of technical understanding and will want to see other scientists validate the science. In fields such as healthcare, agriculture and quantum computing, customers will want. to see peer-reviewed papers before committing seriously.

In startups, these papers are often used as powerful marketing material that indicate progress.

We also ask the scientists in our network if the science is for real. When we do this, we are often given many reasons to doubt the technology. We have grown used to this and focus the reviewers on helping us understand what needs to happen for the company to be successful.

In the end, we want to invest in things that are hard… just not against the laws of physics.

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Every day, I write about what I am learning in deep tech venture building. I hope you will follow me if this is valuable to you ⇢ @philmorle

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