The End of Narrative-Only Deep Tech Companies

Why narratives are no longer king, how commercialization expectations are changing, and what deep tech founders should do in 2023

I’ve been quite outspoken in the past that deep tech companies that are able to utilize narrative to proliferate their stories will have structural advantages over their lifecycle as a company. Nicole Ruiz also dove into this in an essay breaking down how deep tech narratives form. I still think in a competitive market with multiple similar stage startups this is important however I would now say that this is a double-edged sword that likely should as a strategy be “tapered off” heading into a Series B raise.

Specifically I time box this as often within deep tech we see high level round milestones as:

• Seed: Founders + idea (maybe MVP) + prior work to prove competence/ability

• Series A: MVP of tech + early pilots and signs of understanding GTM + pricing dynamics

• Series B: Begin to scale commercialization

The fundraising path for deep tech companies relies on great storytelling both because of the imagination needed to see the futures the founders believe in, but also because the technical complexity often is too difficult for many investors to understand. This leads to a culture of founders building “demos” for investors that get their narrative point across and translates “here’s this amazing tech” to “see this thing works”. Demos also give investors plausible deniability if things don’t work out.

Over the past few years during the bull run, a subset of deep tech founders (along with many other founders to be honest) became very good at creating a ponzi scheme of ambition around their companies. They mainly would tell various narratives around how adjacent expansion would create more and more value (despite not having solid economics of the primary goal solved), or would pitch grandiose market expansion visions in order to get overly-FOMO’d investors to toss money into their rounds at escalating prices, absent any traction.

I wrote about this dynamic and some of the greatest companies that have accomplished this in my piece Narratives & Pseudosecrets, effectively pointing out that the best founders proliferate a given secret and turn it into common knowledge as a way to build their idea moat.

In theory, within deep tech, investors were willing to buy into this dynamic because once a major technical breakthrough happened, revenue could go from $0 to $50M+ over night, creating a massive inflection point in the commercialization risk of the business, opening a new market, and allowing the company to grow into more traditional valuation metrics. This dynamic isn’t too dissimilar from single asset biotech companies which often are fairly binary in outcome and have very identifiable inflection points (approvals).

Michael Dempsey @mhdempsey

Apparently "Disruptive SPACs" is now a benchmarking category. The most innovative thing SPACs have done is normalize absolutely absurd comparables and projections.

Then in 2020 and 2021 half of those companies went public via SPAC, now utilizing the narrative multiple that this newly en vogue instrument allowed, with 2025E metrics. The other 40% of the companies raised large private rounds, and 10% probably shut down (with more to sadly follow).

The abysmal performance of the public companies has led to both management teams being upended and investors at the later stages souring on the lack of commercial traction while staring at technical milestones that they can’t really understand and thus, do not value. Looking into 2023, the above-mentioned milestones may all now be shifting up a stage, with Series A calling for more commercial proof points.

Put more plainly, deep tech growth rounds have materially slowed due to the structural failure of businesses, potentially fraudulent projections, as well as a lack of willingness to back highly capital intensive businesses that are not commanding material multiples at exit in a higher interest rate environment.

Deep Tech startups must be significantly more commercially advanced

Michael Dempsey @mhdempsey

My original thesis on deep tech and SPACs being a good match came from ability to raise large sums of capital to finally scale over multiple years, but I thought that scaling would come in at slightly more robust commercialization, not effectively pre-material PMF.

It’s at this point that I would argue the prior advice of building an ever-escalating narrative has now turned into a mixed-signal for the best companies. While deep tech companies at mid to later-stages must still be world class storytelling organizations in an effort to capture talent and investor dollars, the commercialization path and org must be significantly more fully featured than in prior years. This shift means that this motion must be started significantly earlier in the company lifecycle.

It no longer is believable that technology will sell itself, and it is more important than ever to be able to sequence to multiple commercial milestones (that lead to dollars on the balance sheet, not LOIs) in order to show step function changes of value accrual instead of technical milestones of years past.

This means startups must be better at scrutinizing the seriousness of potential early pilot customers and partnerships, while being ruthless in prioritization of the inevitable NRE that gets done for customers. In BD conversations, startups should be intimately aware of the collective buy-in of stakeholders instead of a singular Champion due to the unsteady economic environment.¹

In addition, more upfront conversations about payment will need to happen in order to both appease investors as well as minimize potential risk of disaster at the end of a long sales cycle. This will be a stark and uncomfortable change versus before when these were often left for later due to “unpaid/underpaid pilots with a promise to convert to higher dollar amounts” being enough for capital markets to get excited.

All in all, building a deep tech company now carries a higher burden of proof than many founders are used to. Founders post-Series A (and maybe at the A!) that continue to run the playbook of Visionary Storyteller with Advanced Technology that can change Multiple Huge Markets will likely be met with some skepticism and a “come back once you have material revenue”. This will leave a lot of early-stage companies filled with talent and IP, but unable to raise adequate capital to go heads down on engineering to scale commercialization, and thus unable to scale even the smallest world-changing narratives that deep tech companies are capable of.²

1. Nothing kills a partnership faster than the Champion being laid off.

2. There’s another entire post to write on Generative AI right now and how understanding when your thing is at peak narrative likely outlasts cycles. While many companies in this space have defied valuation physics and perhaps common sense in terms of product, the reality is that most of the excitement around AI is due to the clear revenue generating capabilities of AI-first software companies today. A conversation for another post could be why the capital intensity of these companies is wildly misunderstood by investors.