Navigating the capital constrained landscape: implications for deep tech

May 20, 2024

By leveraging advanced science and engineering-based innovations and breakthrough technologies, deep tech companies are addressing some of the world's most pressing challenges.

But in the current environment where risk capital is limited, and the focus for many startups has shifted to achieving operational efficiencies and having a clear path to profitability, deep tech companies face unique challenges. Characterised by high capital needs, prolonged development phases and inherent risks, these companies need to find ways to balance achieving their milestones while conserving funds. As achieving capital efficiency becomes increasingly more important, what does this mean for deep tech and what should they be focusing on?

In brief:  

  • Efficient minimum viable product development and testing of commercial and technical fatal flaws
  • Path to market 
  • B2B products that corporates are motivated to acquire by fear or greed
  • Identifying and avoiding fads vs trends (especially B2C)
  • Understanding whether the tech offers a product(s) or just a feature (features are easier to sell early, but have limited upside, and are generally tough to commercialise on their own if no corporate partners are interested). 
Leveraging public resources in the R&D phase:

Deep-tech startups typically require substantial research and development to create value. Importantly, deep tech companies need to be exploring [and negotiating] strategic partnerships with research institutions that can help reduce the requirement for specialist equipment and skillsets which translates to reducing both overhead and people costs. 

Securing non-dilutive grant funding:

Identifying and securing both local, and where possible international, grants. Because of the non-dilutive nature of grant funding these assist companies to leverage open-source technologies to reduce development costs. 

Securing non-dilutive debt funding:

Securing debt funding provides deep tech companies with the financial resources they need to support growth while preserving equity.

Iterative Minimum Viable Product (MVP)Development:

We find that linking funding to milestones can assist companies to build minimum viable products (MVPs) which address the key technical challenges and test key market hypotheses early, avoiding non-critical spending. At Pacific Channel we often refer to this as “doing the killer experiment.”  This discipline empowers founders who can be more inclined to put off the difficult technical step or market engagement for fear of failure. For research scientists who form deep-tech companies, the killer experiment is often considered as the primary milestone, and commercial questions go unanswered until at or far too close to market launch.   

Strategic Partnerships for Market Entry:

Rather than building out costly and unproven distribution (which will also add friction and cost to an acquirer that already has proven distribution), deep tech companies that focus on strategic partnerships with the incumbent market players can be more capital efficient. These partnerships critically also provide market intelligence, validate the technology, facilitate market entry, and reduce the need for extensive marketing expenditures. 

Targeting Niche Markets:

Identifying and targeting niche markets where the deep-tech solution can provide significant value but requires minimal customization or adaptation to enter larger markets. This approach allows deep tech startups to efficiently trial in a small market before expanding into broader markets with generally the same product i.e. without need for further significant R&D. 

Balancing Products and Services:

Deep-tech startups can often offer both products and services. We encourage our companies to focus on developing scalable products, which create capital and return efficiencies. However, in the early stages, prior to achieving product-market fit there is often also an opportunity to for the company to provide high-margin, customised services. This provides ongoing invaluable first-hand customer/market learning and a stickiness around the core product offering. However, importantly, once markets are identified and well understood, companies need to focus on what is profitably scalable, which is usually a product not a customized service. 

Selecting Regulatory Pathways:

It's well known that obtaining regulatory approval can be a costly exercise. Trialing or entering initial markets that have a reduced, or no, regulatory hurdles can lessen the capital required to achieve a technology or market proof point. Across a number of areas, New Zealand provides an attractive test market and importantly, where possible we should be “regulating at the speed of innovation” to provide NZ-Inc companies a significant time and capital advantage. 

Retaining Talent:

Retaining talent in a deep tech venture, which are often founded by a mature researcher off the back of insights allowed by a long research career, is critical, as is attracting suitable commercial and entrepreneurial leadership. Establishing equity incentives that align and retain key people over the long run is key to creating value. “Start-ups are not a place for training” is a belief amongst our team as it can be very costly on time and capital to be using people that are unproven in a particular role to develop a yet to be proven technology. Having the right people in the right seats is ultimately key to capital efficiency. 


While navigating the capital constrained environment is challenging, we believe it also offers opportunities for innovation, resilience and strategic adaptation. Employing proactive strategies, facilitating strategic partnerships and maintaining a focus on value creation, deep tech companies can continue to drive positive change in the world through their groundbreaking technologies and solutions.