In our previous post, we highlighted why VCs weigh on the founding team so heavily while making early-stage investments. However, while people are crucial, they aren’t the only factor that can make or break a deal. Almost equally important is the technology that powers the product. Despite a strong team that impresses investors, deals get rejected because the product's technology is not defensible or the business model to commercialize the technology is not sustainable.
VCs know that in today’s fast-paced world, cutting-edge technology is often the engine that drives a startup’s success. However, this doesn’t always mean inventing something from scratch. Sometimes, the real innovation lies in how existing technologies are used.
Take Uber, for example: While the concept of ordering a car via a mobile app wasn't a technical revolution in itself, Uber’s innovative use of another technological inflection point, GPS-enabled smartphones, transformed an industry and addressed a significant market need. Uber’s success shows that true innovation isn’t always about inventing new technology but about applying existing tech in transformative ways.
Uber utilised technology Inflection Point
If you literally stopped all AI progress today and you just tried to make valuable products with the existing technologies, I think you could and I’m not suggesting that progress should be stopped, I’m just saying there’s a lot of latent economic value in the existing capabilities of these models, even if there’s no deeper breakthrough.
While groundbreaking tech can be a major selling point, it also comes with risks. Investors worry about whether the technology can be practically applied, scaled, and continuously developed. This doesn’t mean that new technologies are dismissed outright, but VCs will look closely at the team’s track record and whether they can demonstrate the tech’s real-world applicability and potential for scale. They’ll also study regulatory and compliance considerations extensively and conduct thorough technical due diligence to validate what the founders are presenting.
Given these challenges, how do VCs determine whether a technology is worth the risk? Evaluating the technological aspect involves understanding whether the product solves an existing problem, its differentiation from existing solutions, and any technical dependencies. They also consider the scalability, potential barriers to entry and the development timeline for the technology. In addition, proof of concept for the technology lies in the market adoption signals, user growth, and revenue generation are other strong indicators of a startup's potential success. VCs look for validated proof of concept to reduce the risk of failure.
Technological defensibility is of importance too, i.e. the startup’s ability to protect its technology from being easily replicated by competitors. This includes evaluating whether the startup has substantial IP, such as patents, proprietary algorithms, or unique technological processes that provide a competitive edge. In the world of AI, investors believe that proprietary data for training LLMs is key to building defensible technology.
But it’s not just about patents or unique data - it’s about building a competitive moat. VCs look at network effects, where the value of the product or service increases as more people use it, creating a barrier to entry for competitors. Google’s rise in the search market is a classic example. What started as a page ranking algorithm later outpaced top players like Yahoo, AOL, and AltaVista by creating a product that improved with each user, creating a flywheel which turned into a barrier that others couldn’t easily cross.
Google’s search fly wheel
For VCs, technology is more than just a component - it’s the engine that powers a startup’s growth. But, the productisation of such technology is also essential for the startup - although technology can create a solid base, if the building on this base is inadequate, the startup will most likely fail. The balance between cutting-edge tech and strong execution is often what separates startups that secure investment from those that don’t. Ultimately, the startups that succeed are those that can turn their technological engine into sustained growth and market leadership.