Choosing the right deep tech fund manager: 4 essential questions for investors and founders

The world of deep tech investing is exciting. AI and its infinite number of applications are on the rise, gene therapies are curing incurable conditions, lithium-metal batteries are about to be eclipsed by their solid-state counterparts, and robots are on track to becoming as much a part of our day-to-day lives as our phones (which will eventually be fancy pieces of glass that serve as terminals as edge computing becomes obsolete).

And as more generalist investors start to call themselves deep tech investors, I can’t help but lament all of the founders and LPs they will inevitably fail. I’ve learned a thing or two investing in 39 deep tech companies over the past decade as both GP and LP. By directly investing out of my sovereign wealth-backed venture fund and allocating out of my own family office, I have a perspective few managers have. I can see trends at both company and fund levels.

So whether you’re an LP looking to invest in the deep tech space or a founder navigating the world of VC, having the answers to the following four questions is non-negotiable when selecting a deep tech fund manager and entrusting them with your future.

Is your fund manager relying on pivoting?

At the bare minimum, a capable deep tech fund manager understands the gap between a deep tech founder’s aspirations and a realistic product-market fit. An even better fund manager knows the chance of pivoting is minimal and acts accordingly during diligence and beyond.

Deep tech founders tend to be PhDs who have spent decades in labs researching the most niche areas, paving the way for some lofty commercial breakthroughs they intend to bring to market. And while they may be excellent researchers and innovators, they’re often not the most apt at understanding product-market fit.

This is where a deep tech fund manager steps in with a clear understanding of whether a fit exists. They don’t trust a founder’s assumptions or presentations unquestioningly because they know doing so is costly. Deep tech solutions take 9 to 12 months for an entire sales cycle to complete and prove product-market fit. There’s no room for pivoting if it fails. Aiming at the right market from the start is crucial.

Your job is identifying whether a manager has embraced the paradigm shift away from the B2B SaaS playbook. If they’re still “investing in great founders” without understanding what that means for deep tech, they have no idea what they’re doing. A good deep tech VC fund manager will thoroughly understand (and be able to explain) founder-market fit without relying on black box pattern recognition that cannot be explained or replicated . . . which leads me to my next point.

Does your fund manager have an in-depth market understanding?

When you invest in and trust your deep tech fund manager, you are investing in and trusting their ability to generate a return — just as with any other fund manager. Skills are involved, and those skills must be present from the start.

Most people think such a skill is about understanding technology, but the opposite is true — that is, deep tech investment is about understanding the market.

Without the fallback plan to pivot, deep tech fund managers need to come equipped with an in-depth knowledge of the market landscape before they meet with founders. This may look like an unfair advantage to some, as it will undoubtedly produce outsized returns, but to savvy LPs and founders, this should be a prerequisite for any fund manager. Having a deep tech fund manager who knows the problems that lay ahead (and how deep technologies can sufficiently mature to solve them) is common sense.

But we’re not talking about surface-level understanding. The problems deep tech managers need to be privy to tend to be incredibly specific and technical in nature.

Consider a logistics robot, for example, that can only pick and place pallets. This robot is no longer state-of-the-art technology; this skill is not impressive. What matters is their ability to sort and pack the varying sizes, dimensions, and weights of items and orient them into as few delivery boxes as possible. Meanwhile, EV battery manufacturing cost-reduction technologies are actually about changing from wet to dry electrode coating. Does your fund manager know enough to discern a viable solution from a looming failure?

Deep tech companies are solving very specific problems; only a true market expert can understand and parse out which opportunity is realistic and which is sci-fi.

Is your fund manager full of it, or does their investment approach make sense?

It’s too common for managers to tout competitive advantages that cannot be quantified. Having a unique network, a team of technical experts, and the ability to “pick the right people” sounds excellent. Still, there’s no way to perform due diligence and verify these attributes.

Fortunately, in the world of deep tech, they’re also not really that important — and the VCs who boast this type of edge are often the same who (foolishly) take a founder-focused approach straight out of the software investment playbook, as mentioned above.

Don’t fall for catchy buzzwords and meaningless phrases like “rock solid founder” or “technology enthusiasts” or whatever else people say to “manifest” their “giants.” Sure, shiny can be nice to look at, but it can also blind you.

Instead, seek out a deep tech fund manager who can walk the deep tech walk and talk the market talk. For my team and I, this looks like providing samples of the over 80 research papers we’ve compiled to fully understand where opportunities are and how they align with our investment criteria.

Suppose you’re looking at a fund utilizing a quantitative investment approach. In that case, you will need to dig into their model and truly understand the variable the model is sensitive to. By understanding how and when a model cannot be used, you will be able to see if it’s actually being used.

Deep tech is a precise science requiring experimentation, the ability to hypothesize, and the determination to bring revolutionary technologies to markets with a status quo. Without discerning solutions, market fit, and speed bumps that will inevitably occur, you’re just investing in clever marketing. A good deep tech fund manager won’t fall victim to the ideation and potential of a deep tech solution. They will remain focused on the most probable opportunities, plan for success, and know the limits of their investing approach. After all, no single investment approach will work in every case.

Is your fund manager investing in an enduring market and real opportunity?

One thing is true both inside and outside of the boardroom: A big but stagnant problem can be accepted and written off as “business as usual,” but a growing problem causes anxiety.

Many companies, such as digital health companies, are tackling big problems with no momentum behind them. Sure, these solutions have the potential to make life easier, but almost all of them fail, mainly because there’s no real need to adopt them now. On the other hand, medical devices creating breakthrough diagnostics for chronic conditions will find themselves as a priority for payers — most of whom are heavily interested in reducing healthcare costs.

That said, not all markets are created equally.

To master deep tech investing, a VC fund manager must understand not just any market opportunities but also ones growing in size and at a rate that cannot be ignored. Those who can do that and connect the dots to the right founders are worth looking into.

Select a deep tech fund manager who leaves you with more answers than questions

If you’re looking for an excellent deep tech fund manager, look for one who understands market opportunities, secular trends, and the difference between solutions that will work and those that still need refining. Deep tech can and will play its part in these spaces, but your manager must know the difference between market-ready alternatives to things that are no longer an option and magical thinking.