Welcome to the 57th edition of Deep Tech Catalyst, the channel by The Scenarionist where science meets venture!
Geopolitical pressures, supply chain vulnerabilities, and sustainability challenges are driving the demand for innovative industrial technology solutions.
However, founders of capital-intensive Deep Tech startups often struggle to define how to build a company that can develop these technologies and transform them into innovative products within a short timeframe.
To help navigate these challenges, we are thrilled to welcome Aidan Madigan-Curtis, Partner at Eclipse Ventures!
Our exciting conversation unfolds into 3 main themes:
The geopolitical and economic forces driving the urgent need for massive industrial innovation, highlighting technologies such as edge computing, robotics, and advanced manufacturing as essential to rebuilding industrial supply chains.
The pivotal role of edge computing as a foundational infrastructure for modern industrial development.
Key questions and practical strategies to navigate the pre-revenue stage and transform promising prototypes into scalable, investable industrial ventures.
Key Themes Covered:
📈 Critical Trends Driving the Need for Edge Computing and Industrial Innovation
🧮 The Case for Edge Computing: A Critical Innovation for Reindustrialization
✅ 4 Tips for Planning Scalable Ventures
📊 Customer Discovery and Pricing Strategies
🎯 3 Tips for Conducting Your First Customer Interview
💡 Cost of Sales and Unit Economics: A Practical Example
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KEY INSIGHTS FROM THE EPISODE
📈 Critical Trends Driving the Need for Edge Computing and Industrial Innovation
Guns, Germs, and Steel
Reflecting on Jared Diamond's book Guns, Germs, and Steel, we can draw parallels between its themes and the intense changes of the last half-decade. These trends significantly influence the demand for edge computing and the broader tech ecosystem.
Geopolitical Pressures
Global Conflicts: The ongoing war in Ukraine and heightened tensions between major superpowers like the U.S. and China have reshaped international relations. These conflicts emphasize the need for advanced technology, especially in defense and cybersecurity.
Semiconductor Race: Advanced semiconductor production is a focal point of this geopolitical competition. While China is currently limited to five-nanometer technology, other nations are pushing boundaries with three- and two-nanometer chips. Restrictions on sharing chips, manufacturing equipment, and expertise further intensify these dynamics.
U.S. Defense Innovation: The U.S. is experiencing a renaissance in defense technology, with increased spending on hypersonic weapons, munitions, and advanced manufacturing techniques. However, domestic production capabilities struggle to keep pace with demand, necessitating more software-driven, technology-intensive approaches to manufacturing.
Supply Chain Vulnerabilities
Pandemic Impact: The COVID-19 pandemic exposed the fragility of concentrated supply chains. It spurred countries and corporations to rethink domestic production of essentials, including pharmaceuticals and semiconductor components.
Supply Chain Diversification: Technologies like software-defined manufacturing and 3D printing are paving the way for localized, efficient production. For instance, Vulcan Forms leverages advanced laser-based 3D metal printing to replace traditional CNC machining. Similarly, supply chain visibility tools, like those from Altana AI, help organizations track and manage their supply chains more effectively.
Sustainability and Material Production
Carbon-Intensive Manufacturing: Producing essential materials like steel and concrete is among the most carbon-intensive industrial processes. Yet, these materials are critical for addressing challenges like the U.S.’s 4–5 million housing shortage.
Demographics, Robotics, and the Future of Manufacturing
Aging populations are reshaping labor markets, particularly in industrial sectors. Many workers are looking forward to retirement after decades of contribution. This necessitates a shift in how we approach productivity and growth.
Productivity Through Automation: To achieve ambitious growth and meet production demands, automation must play a central role. By adopting robotics and computing power, human workers can transition to roles as technicians, supporting automated systems rather than relying on physical labor.
Enhancing Productivity: Automation allows a single person to oversee processes that can produce ten times as much as traditional methods. This approach supports full employment, better health outcomes, and improved overall productivity.
🧮 The Case for Edge Computing: A Critical Innovation for Reindustrialization
Relying solely on centralized computing power in data centers is no longer sufficient for handling the critical, real-time data collection required in many modern applications. Edge computing addresses this gap and plays a pivotal role in advancing industries essential to the economy's reindustrialization.
Edge computing is a transformative technology built on several key elements:
Silicon Technology: Chips or devices designed to perform computational processes locally at the edge.
Connectivity: Mechanisms to transmit data collected and processed at the edge back to central systems, such as the cloud, for additional analysis and storage.
For example, companies like Samsara utilize compact sensors embedded with highly efficient silicon technology designed for edge operations. These sensors can collect data from a wide variety of sources, including:
Large-scale fleets, ensuring operational efficiency and reliability.
Critical machinery and infrastructure, such as agricultural systems or energy generation facilities like dams, where real-time monitoring and analysis are indispensable.
The Role of Cloud Computing in Edge Systems
While edge computing enables localized data processing, it works in tandem with cloud computing, which handles compute-intensive tasks like AI modeling and large-scale analytics.
The integration of edge and cloud computing forms the backbone of modern technological infrastructure, ensuring real-time processing at the edge while leveraging the cloud for deeper analysis and seamless data delivery to end-user devices such as phones and laptops.
Addressing these challenges is essential as geopolitical pressures and industrial demands drive the adoption of edge technologies.
Key Questions for Deep Tech Startups
Edge computing is just one of the critical components needed to fortify a vulnerable B2B industrial supply chain.
However, building Deep Tech companies able to create competitive advantages within a limited timeframe is a formidable challenge.
This leads to further essential questions, starting with:
What makes a pre-revenue industrial tech startup attractive to VC investors?
What steps are crucial when the product is still in development?
How should early customer conversations be approached?
What is the right price for the product I am developing?
Where does financial planning begin for capital-intensive projects?
✅ 4 Tips for Planning Scalable Ventures
Founders must adopt a structured approach when envisioning their company, especially during the pre-seed and prototyping phases. Early assumptions about technical and economic viability are critical to proving a concept’s commercial potential. To align with venture capital (VC) expectations, consider these points:
1. Understand the Venture Capital Game
Venture capital (VC) investments are highly competitive and nonlinear in returns. VCs are answerable to their investors (foundations, endowments, pension funds) and need exponential returns to justify their investments. Typically, this requires investing in companies with the potential for multi-billion-dollar valuations.
2. Think Like an Entrepreneur
Identify large market dislocations or “bleeding issues” where companies are economically struggling and urgently need solutions.
Deliver Exceptional ROI: Your product must provide a return on investment (ROI) that is 10 to 15 times better than the incumbent solutions. This includes being cost-effective, and easy to use.
3. Scalability and Economics Matter
Ensure your product’s cost of production is significantly lower than its selling price. As the company scales, margins must improve.
Market Scalability: Public markets should reward your company’s growth with favorable multiples, which VCs rely on to achieve their 1:50 dollar ratio in returns.
4. Efficiency in Sales and Operations
Cost of Sale: Consider how much it costs to sell your product. You cannot sell for $100 if your sales cost is also $100.
Lifetime Value: Evaluate the lifetime value of your product to the customer and aim to improve sales efficiency over time.
📊 Customer Discovery and Pricing Strategy
In the very early stages of building a company, it’s crucial to establish realistic financial assumptions and a feasible pricing structure. This process helps determine whether your business idea has commercial viability.
To build a strong financial foundation, founders must:
Investigate current customer spending and willingness to pay.
Demonstrate early commercial validation to attract investor confidence.
Develop a clear path to competitive pricing and sustainable unit economics.
Understand the Customer’s Existing Budget
Start by evaluating whether your potential customers already allocated resources to solve the problem your product addresses. Key questions include:
Is there a budgeted line item? (For example, find out how much they currently pay for their existing solution.)
How is pricing structured?
Understanding these details gives you a benchmark for your pricing.
Stack Costs for Comparison
If your product replaces a combination of manual processes, existing technologies, or both, calculate the total cost customers currently incur for those solutions.
Your goal is to demonstrate:
Cost Savings: Your solution should cost the customer significantly less.
Value Addition: If your product delivers more value, such as higher efficiency or better performance, it may justify a premium price.
Early Commercial Validation
Investors prioritize commercial validation in the early days of a startup. Demonstrating that customers are willing to pay for your product—even if it’s not your final price—shows that they have “skin in the game” and believe in its value.
Initial pricing doesn’t need to be perfect but should reflect customer willingness to pay.
Over time, as you refine your product and brand, you can explore pricing models that increase margins.
🎯 3 Tips for Conducting Your First Customer Interview
1. Ask the Right Questions
When engaging with potential customers, focus on gathering actionable insights:
What are they currently paying?
Understand their existing costs for similar solutions or processes.What’s their pain point?
Identify whether the current solution is inefficient, costly, or inadequate.How do they measure ROI?
Learn what metrics matter most to them, as this will help you position your product effectively.
2. Establish a Path to Competitive Economics
While early-stage pricing doesn’t need to align with long-term targets, you must demonstrate a future path toward:
Gross Margins: Aim for a 75% margin as a benchmark over time.
CAC Payback: Show that you can recoup customer acquisition costs (CAC) within a reasonable timeframe (e.g., one year).
3. Analyze Competitive Dynamics
As you grow, pricing will depend on your understanding of the market:
Competitive Pricing: Know what competitors charge and how your product compares.
Customer Willingness to Pay: Test different pricing models to find the sweet spot between affordability and profitability.
💡 Cost of Sales and Unit Economics: A Practical Example
For a business to succeed, founders need to carefully monitor and optimize unit economics. This means ensuring that the cost of sales and marketing is proportionate to the revenue generated per unit sold. Additionally, scaling the business should lead to lower acquisition costs and improved profit margins, ensuring long-term sustainability and market competitiveness.
Cost Breakdown per Unit Sold
Let’s hypothetically consider a scenario where a license is sold for $100. The cost of acquiring and closing that sale can be broken down into key components:
Marketing Costs: $20
This includes all the efforts to generate leads, create brand awareness, and drive potential customers into the sales funnel.
Sales Costs: $30
This covers the combined expenses of the sales team, including the salaries of sales engineers and account executives, as well as the commissions they earn on closing deals.
Together, these costs amount to $50 of the $100 license price, leaving $50 as potential gross profit.
Sales Funnel Efficiency
The sales process starts with a broad funnel where significant marketing and sales activities are focused on generating leads and nurturing them. However, not all leads convert. For instance, if only 10–20% of initial prospects result in closed deals, the costs per successful sale can increase substantially because the expenses for unconverted leads still contribute to the overall cost of the sales process.
Balancing Costs and Market Viability
To maintain profitability and competitiveness:
The total cost of acquiring a customer (e.g., $50 in this example) must remain sustainable relative to the product price and comparable to market expectations.
Over time, as the business scales and optimizes, the costs per unit sold should decrease. Efficiency improvements might include better targeting of prospects, streamlining sales efforts, or leveraging automation.
