Why deep tech investing is different, the Power Law, fund-return math, and what VCs really screen for (team, market, capital efficiency).
1. What Deep Tech VCs Actually Want
Deep tech venture capital is fundamentally different from software investing. While software VCs can take market risks and iterate quickly, deep tech VCs need a more disciplined approach due to the longer development cycles and higher capital requirements.
The Economics That Drive Everything
Venture capital operates on the Power Law: most investments fail, a few do okay, and one or two generate massive returns that make the entire fund profitable. For deep tech VCs, this math is even more extreme.
The brutal reality:
- 50-80% of deep tech companies will fail or go sideways.
- Of those that succeed, most will generate modest returns.
- Only 1-2 companies per fund will deliver the 30x+ returns needed to make the fund work.
This means deep tech VCs need each investment to have credible potential to return the fund.
It's not enough to build a good business – you need to build a business that could theoretically return an entire fund on its own.
Fund size matters: A $20M fund can get excited about a $100M exit. A $200M fund needs billion-dollar outcomes. Understanding your VC's fund size and return requirements is crucial for alignment.
The Core Trade-off
Because deep tech carries inherent technical risk – will the science actually work? Can you build what you're proposing? – most deep tech VCs compensate by minimising other types of risk:
- Market risk: We prefer obviously large markets over markets we need to convince ourselves about
- Team risk: We need technical founders with deep domain expertise, not just entrepreneurial ambition
- Capital risk: We want to see a clear path to follow-on funding and eventual exit
What This Means for Founders
Deep tech VCs are looking for the intersection of:
- Breakthrough technology that creates genuine competitive moats
- Massive market opportunities with clear paths to billion-dollar outcomes
- Technical founders who can navigate both the science and the business
- Capital-efficient milestones that systematically de-risk the path to scale
The bar is high because the stakes are high.
Deep tech investments take longer, cost more, and have more binary outcomes. But when they work, they create the companies that reshape entire industries.
Know your VC: Not all funds play this game. Smaller funds can afford smaller outcomes, corporate VCs have different strategic motivations, and government funds may prioritise impact over returns. Understanding who you're working with and what success looks like for them is crucial for building the right partnership.
2. What Outset Invests In (at Seed)
At Outset, we focus on seed-stage deep tech companies where breakthrough science meets massive commercial opportunity.
Our investment thesis is built around three non-negotiable pillars that work together to create investable propositions.
Deep Tech Investment Non-negotiables
1. The Science Must Be Defensible | We're looking for sufficiently deep technology – not incremental improvements, but genuine scientific and engineering breakthroughs that create obvious technical moats.
This means: | • 80%+ R&D intensity at early rounds is expected, not concerning
• Technology that will be genuinely hard for competitors to replicate
• Clear IP ownership with teams capable of advancing the science beyond its origins
• High technical risk that we're comfortable underwriting because the payoff justifies it
We're not interested in applying existing technology to new markets. We want technology that fundamentally changes what's possible. |
2. The Market Opportunity Must Be Obvious | Because we're taking significant technical risk, we can't afford market risk.
We look for: | • Platform technologies with multiple commercial pathways, not single-use solutions
• Commodity disruption where your technology offers step-change advantages in cost, time, quality, or scale
• Market creation potential – technologies that don't just serve existing markets but create entirely new ones
The market opportunity should be self-evident, not something we need to convince ourselves about through extensive modeling. |
3. The Founders Must Be Technically Obsessed | We back technical founders with deep domain expertise, not entrepreneurial generalists who've stumbled into deep tech.
We look for: | • Domain obsession – founders who are genuinely passionate about solving specific technical problems, not just building startups
• Technical credibility through experience, advanced degrees, or demonstrable expertise in the relevant field
• Coachability around business building, because the technical timeline demands founders who can fundraise, hire, and communicate effectively
If technical expertise is missing from the founding team, it must be added through co-founders or early technical hires with meaningful equity stakes. |
Beyond Seed: What We Track
As companies mature, we closely monitor their ability to:
- Attract scarce technical talent from limited global pools
- Build commercial partnerships that validate R&D direction before revenue
- Secure follow-on capital from investors who understand deep tech timelines
- Execute against milestones that systematically de-risk the path to scale
Outset’s Investment Process
Every potential investment undergoes rigorous technical evaluation including founder interviews, site visits, independent technical deep dives with industry experts, and IP diligence. We're looking to make informed bets on breakthrough technologies with credible paths to billion-dollar outcomes.
The bar is high because the stakes are high. But when deep tech works, it creates the companies that reshape entire industries.
Outset Ventures — Launchpad for NZ’s Deep Tech Startups
Outset Ventures offers specialised lab and prototyping facilities for deep-tech and hardware startups, alongside early- to growth-stage investment for science-led ventures. Founded by the first wave of Kiwi innovators in deep tech. Founders can access physical infrastructure, expert support, and capital under one roof, making it a launchpad for NZ-based deep tech startups.
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