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Mind the Gap: How DeepTech Founders Can Navigate the Hardware Financing Chasm
Much of the discussion around financing tech startups revolves around venture capital - equity financing that fuels R&D, team building, and scaling go-to-market strategies. Relatively little is said about the role that debt finance can play in early-stage tech companies, particularly those in DeepTech sectors combining software and hardware. Yet debt financing has an important role to play, and founders need to be more aware of both its advantages and its limitations.
This financing challenge becomes particularly acute for DeepTech companies transitioning from the lab to small-scale production. Raising equity to fund software development or early prototypes is a well-established path. But once capital is needed for hard assets - production facilities, pilot lines, or manufacturing runs - the funding landscape becomes much less familiar. Founders often find themselves in a position where neither equity nor traditional debt fits their needs neatly, creating a new kind of “chasm” that must be crossed.
The Technology Adoption Curve and Where the Chasm Lies
For context, let’s revisit the idea of Crossing the Chasm. Geoffrey Moore’s framework, familiar to many founders, describes the journey from early adopters to mainstream customers. Between the two lies a dangerous gap that few startups are able to cross: 'the chasm'.
Only startups that successfully transition from enthusiastic early adopters to a credible mainstream beachhead can escape the gravity well of niche markets. This often correlates with the Seed to Series A funding transition.
In DeepTech (and any other vertical where hardware is part of the solution), this journey is often expressed in terms of Technology Readiness Levels (TRLs). At Duet, we’ve found the mapping between TRLs and the technology adoption curve to be a useful tool for founders thinking about their fundraising strategy. This varies by industry but a general approximation is as follows:
In this scenario, the chasm sits between TRL 5 and TRL 6. This is the moment where a technology, validated in the lab and through early pilots, must prove it can be commercialised at scale. From a financing perspective, it’s also where things get complicated.
Financing the Journey Across the Chasm
Some of the most active investors helping DeepTech startups cross the chasm are corporate venture capital arms (CVCs) and/or specialist DeepTech funds. These investors understand the long gestation periods, the technical risks, and the complexities of taking hardware-heavy technologies to market. Often, they’re supported by government grants - InnovateUK is a good example for UK companies - which help fund R&D and reduce technical risk.
Equity capital is well-suited to funding the development and acquisition of intangible assets. If you’re building intellectual property, hiring engineers, or developing software, equity works. Investors are betting on the future potential of the business, and they understand their capital is being deployed to create value that’s inherently risky and intangible.
But things get tricky when capital is needed for tangible assets - manufacturing facilities, pilot production lines, and specialised equipment. These are classic use cases for debt financing. The problem is that the debt financing world is designed for businesses with predictable revenues and positive cash flows. Banks and other lenders want assurances: a clear path to repayment, tangible collateral, and ideally, a track record of profitability.
For a DeepTech company that’s just beginning to scale production - with limited early revenues and still loss making - these conditions are hard to meet. What you have is a business model straddling two worlds. Equity is a poor fit for hard assets. Debt is a poor fit for companies still crossing their first mainstream beachhead. And so, founders find themselves in a financing chasm that’s every bit as daunting as the commercial chasm their products are trying to cross.
Scaling Production: The Next Financing Hurdle
Even if a company finds a way to bridge the chasm and secure early-stage funding for initial market entry, another hurdle looms: financing production at scale. Manufacturing facilities for hardware are capital intensive, whether at the more modest end - such as small scale assembly operations requiring specialised equipment and clean environments - or at the more extreme end such as gigafactories for batteries, advanced manufacturing lines for photonics or micro-fabs for semiconductors. Even modest facilities can require capital investment running into millions of pounds, making the financing challenge significant across the spectrum.
In theory, this is where debt should shine. Debt financing is designed to fund capital expenditure (CapEx), and large infrastructure projects have historically been funded with debt. But few debt providers understand the realities of early-stage DeepTech businesses. They see the lack of predictable revenues, the complex risk profile, and the absence of traditional collateral as red flags. Even lenders who claim to understand technology often default to traditional risk metrics that don’t apply to the companies they’re assessing.
One of the most common stumbling blocks at this stage is the tension between equity and debt financing. While they should be complementary, in practice they often pull founders in different directions.
Why Equity and Debt Don’t Always Play Nicely
For early-stage DeepTech companies, the interplay between equity and debt financing is often fraught with complications. Although the two forms of capital should theoretically complement each other, in practice they frequently present conflicting demands and expectations.
First, debt providers typically require predictability - steady revenues, margins, and cash flows that demonstrate the company’s ability to service debt. Most DeepTech companies, especially those building hardware, don’t have that predictability at TRL 6 or 7. They’re still validating markets, refining products, and experiencing lumpy or limited revenues. This makes lenders cautious.
Second, timing and risk tolerance create friction. Equity investors accept the risks inherent in funding R&D, product development, and market entry. Debt lenders, however, focus on tangible downside protection and repayment ability. The risk-return profiles are fundamentally different, leading to a mismatch in expectations when companies try to use both financing types in the early phases of commercialisation.
Third, debt often imposes covenants and restrictions that can limit operational flexibility. Lenders may impose conditions on further equity raises, capital expenditures, or even product strategies. In the dynamic, uncertain world of early-stage DeepTech, these constraints can be problematic and can slow down decision-making.
Fourth, many traditional debt providers are unfamiliar with the risk profile of DeepTech startups. Even when there’s interest, they may struggle to model the risks associated with unproven hardware technologies or long commercialization timelines. As a result, many founders find themselves frustrated by processes that don’t reflect the realities of their businesses.
These realities contribute to the perception that equity and debt financing are often incompatible in the earliest stages of DeepTech company development. But that picture is starting to change with the growing role of venture debt.
The Growing Role of Venture Debt in Bridging the Financing Gap
In recent years venture debt has become an increasingly prominent feature of the European venture financing landscape. Deal value grew a remarkable 27% in 2024 according to Pitchbook. While historically less developed in Europe than in the US, venture debt is now seen as a key tool for early and growth-stage companies navigating capital-intensive phases of their development.
Venture debt differs from conventional bank loans in ways that make it more compatible with VC-backed DeepTech businesses. First and foremost, it’s structured with the recognition that these businesses are still in their formative stages. Lenders typically focus less on current profitability or predictable cash flows and more on the strength of the venture investors backing the company, the potential for future equity raises, and the business’s long-term growth trajectory.
Unlike traditional debt, which often requires tangible assets as collateral and strict covenant compliance, venture debt is usually unsecured or lightly secured. It often includes warrants or other equity kickers, aligning lender incentives with the company’s growth. This makes it a better fit for DeepTech startups that are pre-profit, may have lumpy or limited early revenues, and are in the process of crossing their first mainstream market beachhead.
For many DeepTech founders, venture debt can act as a critical bridge between the traditional equity rounds used to fund early R&D and go-to-market activities, and the more mainstream debt financing typically associated with mature, cash-generating companies. It can extend runway without forcing additional dilution, fund CapEx that equity investors may be reluctant to support, and serve as a stepping stone to larger infrastructure loans in the future.
However, while venture debt is often positioned as “non-dilutive,” founders should approach it with the same level of diligence and strategic thinking as any equity round. The repayment obligations and potential restrictions can create future complications if not carefully aligned with the company’s growth and funding strategy.
Planning to Cross the Financing Chasm
Crossing the financing chasm requires thoughtful, proactive planning. Founders need to align different types of capital with different phases of business evolution. Unfortunately, there’s no universal roadmap for this; the landscape varies widely by geography, sector and company circumstances.
Across Europe, some countries offer government initiatives aimed at bridging the gap between R&D and commercialisation. Many of these schemes - such as innovation loans or blended finance mechanisms - focus heavily on funding IP creation and R&D activity. That’s helpful in the early TRLs, but less so when it comes time to finance a production facility or scale manufacturing.
For founders building their own hardware products, rather than outsourcing manufacturing, the financing challenge is particularly acute. Some manage to fund CapEx through equity, but this isn’t a sustainable approach. Venture investors are increasingly resistant to equity being used to finance infrastructure that doesn’t directly accelerate growth or IP development. There’s a limit to what’s acceptable here.
Innovative approaches are emerging. Some founders blend equity with non-dilutive grants, particularly for ClimateTech and advanced manufacturing. Others are turning to alternative lenders, family offices, or project finance structures that are more flexible than traditional banks. In a few cases, corporates or strategic investors are stepping in with hybrid capital structures that combine equity, debt, and customer prepayments.
But none of these options appear overnight. They require careful relationship-building, a deep understanding of the capital landscape, and a financing strategy that’s developed long before the company runs out of runway.
Conclusion
For DeepTech founders, financing isn’t just about raising the next round - it’s about designing a capital strategy that evolves with the business. The financing chasm is real, and it mirrors the commercial chasm their products must cross. Understanding the limitations of equity and debt, and how they interact at different stages of business maturity, is essential.
Experienced founders learn not to wait until they’re in the chasm to figure this out. They map their financing needs to their technology roadmap, and they think about capital structure as carefully as they think about product-market fit. Because in DeepTech, it’s not just the technology that needs to scale - it’s the financing model too.
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