An article recently published online with the title “Europe needs more scientists in VC to become a deeptech powerhouse – Tech.eu” highlights the fact that the problem deep-tech startups are facing is still not widely understood. A good understanding of the problem a deep-tech startup addresses with its technology can be mediated by a better process within the startup (a significant part of our—TD Shepherd—work is to “format” a startup’s focus into a story the outside world can understand, connect with and “own”). Therefore, the real problem is not solved by bringing more scientists into the VC teams—they would quickly lose their skills and signify a loss to the engineering community. What the deep-tech startups do need are venture funds with a significantly longer lifetime and deeper pockets – it is as simple as that. The availability of sufficient venture capital over the lifetime of a deep-tech startup (for instance, a fabless semicon startup will, on average, exit after ten years and a total investment of € 50-60M). While the availability of seed/early-stage capital is becoming easier (although the amounts remain (significantly) lower as compared to the USA), the later-stage rounds are increasingly difficult for EU-based deep-tech startups. That is where the real problem is located, not the lack of scientists in the VC community.
One of the challenges that comes with design services is the cyclical nature of the services business. When the economy tightens and corporates are watching their operational expenses, the first step will be to halt any external contracts/contractors which are not deemed absolutely essential.
Whereas the earlier (staircase) model is a good approach in scaling up revenue and creating new revenue streams, the foundation of the company is still based on the service model: headcount continues to be the main driver (typically up to 60-70% of revenue). In terms of (enterprise) valuation the additional revenue streams, however, will already make a significant difference.
Design services companies typically start small (some exceptions when it concerns management buy-outs) and natural growth is a slow process as it requires hiring and training of engineers based on/driven by the revenue stream of the company. Growth of business is tied to growing the team and it is not always easy to find the engineers.