How Deep-Tech Funds Invest

Investments in scientific and deep-tech startups today represent one of the few segments where investors can achieve above-average returns in the long term, but at the cost of significantly higher technical and regulatory uncertainty. At the same time, both the European capital market and fund regulations have been dynamically changing in recent years – from the Czech Act on Investment Companies and Investment Funds (ZISIF) to the AIFMD II directive, the transposition of which under Czech legislation is being discussed in 2026; the directive had to be implemented by April 16, 2026, and the Czech amendment had not been adopted as of the date of publication of this article.

What are scientific and deep‑tech startups and why they are financed differently

Scientific and deep‑tech startups differ from standard technology companies in that their value is primarily based on deep scientific or engineering know‑how, rather than the rapid implementation of existing technologies into a new business model. They typically operate in fields such as artificial intelligence, quantum technologies, advanced robotics, biotechnology, materials engineering, energy, or space technologies.

According to MIT REAP and other leading institutions, these are often projects that originate in an academic environment. These projects leverage the results of long-term research and generate hard-to-replicate know‑how and specific intellectual property.

A key feature of deep‑tech startups is that they primarily carry technical risk, while market risk tends to be relatively lower – if the scientific problem is solved, the market typically exists and is sufficiently large. This is a fundamental difference from many classic startups, where the technology is relatively simple but customer interest is unclear.

In deep‑tech projects, on the contrary, the main question is whether it will be possible to bring the solution technologically and regulatorily to a marketable product. The consequence is a significantly longer development timeline. Many deep‑tech startups need years of pure research and development, clinical trials, certifications, or pilot installations before achieving significant revenues – in biotechnology or new energy, this can standardly take 7 to 10 years.

During this time, they repeatedly need external capital, which practically rules out bank financing. Therefore, venture capital through specialized funds and public grant schemes is primarily utilized here.

From the perspective of both investors and founders, it is important to understand that standard rapid metrics such as user growth or monthly recurring revenue (MRR) often do not make sense here. Instead, R&D milestones, patent application statuses, successful prototypes, pilot project results, or regulatory steps are monitored.

The legally binding setup of these milestones in investment agreements and their enforceability is a typical area where the Czech legal team at ARROWS law firm helps negotiate a balance between investor protection and the realistic capabilities of the scientific team.

Specifics of deep‑tech projects from an investor's perspective

From an investment perspective, deep‑tech startups represent a significantly higher risk than standard corporate loans or investments in more mature companies. A study by the European Investment Bank shows that for companies based on key enabling technologies, the annual portfolio loss rate can hover around 15–20%.

This explains why specialized funds with a high risk tolerance are primarily used for deep‑tech financing. In addition to the probability of failure itself, time is also a crucial parameter. If a deep‑tech startup has an annual survival probability of, for example, 80%, then the probability of surviving 5 years is mathematically approximately 33% (i.e., only one third).

For an investor, this means they must highly anticipate that many projects will not reach the exit stage at all, and the return on the entire portfolio must be secured by only a few successful companies.

Furthermore, deep‑tech projects often operate in highly regulated sectors, such as medical devices, human pharmaceuticals, energy infrastructure, defense technologies, or the financial sector. This means not only more complex licensing and permitting processes, but also a higher risk of regulatory changes.

In these cases, the Czech legal team at ARROWS law firm typically verifies whether the startup can realistically obtain the necessary permits and what licenses are essential for operation. The aspect of high capital costs should also be mentioned. For deep‑tech projects, the capital required for prototyping, laboratory equipment, or pilot projects is usually significantly higher than for pure software startups.

Negotiating how large an investment reserve the fund plans and under what conditions it will be used is another key topic of contractual setup, in which the Prague-based ARROWS law firm helps clients.

Link to universities and technology transfer

A large portion of deep‑tech startups originate as spin‑off companies from universities or public research organizations. A typical scenario is that a research team developed a new technology within a research project, the university patented it, and is looking for a commercial path to monetize it.

This creates a new startup that obtains a license from the research institution to use the research results in exchange for licensing fees and often an equity stake in the newly established company. The technology transfer process is extremely complex from a legal perspective. According to the Civil Code, the Copyright Act, and the Patent Act, it is necessary to precisely define the subject of the license, whether the license is exclusive, for which territory and field of activity it is granted, and how the licensing fees are structured.

An inappropriately set up license agreement with a university can lead to professional investors refusing to enter the startup because the ownership of the intellectual property will be unclear.

The internal setup of relations between the founders and the startup is also crucial. Every member of the development team must have an agreement with the company on the transfer of rights to the results of intellectual activity or on the exercise of rights to employee works, to avoid a situation where a key developer personally claims rights to the technology.

The Czech legal team at ARROWS law firm prepares founders' agreements, equity vesting setups, employee contracts, and agreements with external suppliers to ensure that IP ownership is completely clean for future investors.

Another important topic is the protection of trade secrets and know‑how that cannot be, or is strategically not suitable to be, protected by a patent. For a specific set of information to be legally protected, the company must demonstrably adopt appropriate technical, organizational, and legal measures to keep it confidential.

Neglecting these preventive legal steps can result in the loss of trade secret protection, which can fatally jeopardize the value of the entire company.

Basic types of funds for financing deep‑tech projects

For financing scientific and deep‑tech startups, venture capital and alternative investment funds (AIFs) under the AIFMD directive and the ZISIF Act are standardly used. However, for deep‑tech projects, it is necessary to expect a longer investment horizon and a highly specialized team with deep expertise to assess technical quality.

In the Czech environment, we encounter two regimes in practice. The first is a fully licensed fund of qualified investors (FKI) under the direct supervision of the CNB. This structure targets institutional investors and offers the highest level of credibility, but at the cost of higher setup and compliance costs.

The second regime is registration under Section 15 of ZISIF, used for smaller funds and club platforms. It allows asset management without a full license, solely based on registration with the CNB. However, this more flexible approach comes at the cost of strict limits, particularly an absolute ban on public offering and restrictions on the volume of assets under management.

Venture capital funds and deep‑tech strategies

Venture capital funds invest in non-public, young companies with high growth potential, with investors accepting that most projects will fail. A typical structure includes active managers (GPs) and passive investors (LPs). The GP is motivated to maximize returns through a combination of a management fee and a share of the profits.

For deep-tech funds, standard lifespan is often insufficient, so the investment horizon is commonly planned for 12 to 15 years. When establishing a fund, it is crucial to model its economics in detail and set up the contractual structure to reliably protect and align the interests of both parties.

Furthermore, this strategy is often associated with narrow sector specialization. In Europe and the Czech Republic, an increased influx of capital has been observed in recent years, particularly into specific areas such as cybersecurity and defense technologies.

The specialization of the fund is important for investors, but it also has legal implications – investments in sensitive technologies and the defense industry may be subject to a strict foreign investment screening regime.

Alternative investment funds in the Czech environment (ZISIF)

The Czech legal framework for venture capital is determined by the ZISIF Act (implementing the AIFMD directive), which regulates both licensed funds of qualified investors (FKI) and the popular registration regime under Section 15 of ZISIF.

A manager under Section 15 of ZISIF, however, must not make a public offering, and an investor must generally invest at least EUR 125,000 and pass a suitability assessment; a lower amount may be invested by a maximum of 20 investors (Section 15, paragraphs 4 and 6 of ZISIF). Furthermore, the legislation strictly prohibits using the word "fund" in the name and mandates the designation "venture capital entity" to prevent misleading the public.

Conversely, while licensed FKIs face higher compliance costs, they provide investors with a substantially higher level of legal certainty. Therefore, the Czech legal team at ARROWS law firm always analyzes the client's intent in detail and recommends the optimal structure based on goals and marketing.

How funds select scientific and deep‑tech startups

The investment selection process in deep‑tech funds differs from investing in standard software platforms. Due to technical risk, due diligence shifts to deep technological analysis.

At the same time, however, venture capital funds are not scientific grant agencies – every investment must show clear commercial logic and realistic potential to generate a return upon future sale.

Investment criteria: technology, team, market

When evaluating scientific startups, fund investment committees focus on three basic pillars: technology, team, and market potential.

For technology, its scientific uniqueness, Technology Readiness Level (TRL), the existence of patent protection, and overall defensibility against competition are evaluated. Funds look for projects that have built a strong barrier to entry in the form of patents and know-how.

Scientific startups often suffer from personnel imbalance. The founding team is usually composed of excellent scientists and academics who, however, lack business experience, financial management, and the ability to lead commercial negotiations. For the fund, it is crucial whether the scientific founders are willing to accept experienced managers into the team.

Even the best scientific technology is worthless from a fund's perspective if there is no sufficiently large commercial market for it. Due to the lack of financial history, specific methods are used to value deep‑tech startups. Instead of EBITDA multiples, a combination of qualitative methods and estimation of the company's future value at exit based on market potential discounted by a high risk rate is applied.

Legal and IP due diligence for scientific startups

A key part of the review of any deep‑tech startup is legal and IP due diligence. The goal is to verify whether the company has the full and unrestricted right to commercially exploit the technology. The origin of ownership, patents, know-how protection, and the relationship to academia are examined, particularly whether the technology was created at a university without proper settlement of rights.

In addition, commercial due diligence takes place, which evaluates the viability of the business model and competitive advantages. It provides investors with an independent view of whether the proclaimed technical parameters have real market value for end customers.

In practice, the Czech legal team at ARROWS law firm works closely with technical and commercial auditors. They then correctly reflect the results of the reviews into the investment agreement, for example, in the form of specific representations and warranties or conditions precedent.

Investment structure: how a fund enters a deep‑tech startup

The actual execution of the investment and the fund's equity entry into a deep‑tech startup require robust contractual documentation.

Although continental legal environments are based on the principles of freedom of contract, standards derived from Anglo-American law have prevailed in the field of venture capital, which must be adapted to Czech law.

Term sheet, valuation, and equity vs. convertible instruments

The first formal step of the transaction is the signing of a document called a Term Sheet. This is a structured summary of the basic commercial and legal parameters of the planned investment. With the exception of specific provisions on exclusivity and confidentiality of information, the Term Sheet is legally non-binding, but in practice, it carries huge moral and negotiating weight.

When structuring an investment, a choice is made between two basic approaches. The first is a direct equity entry (Equity round), where the fund subscribes to newly issued shares in the company's registered capital. Along with this, an Investment Agreement and a Shareholders' Agreement are signed, which govern the mutual rights and obligations of the shareholders.

The second approach is convertible instruments. In the early stages, when it is difficult to determine a valuation, convertible loans or SAFE-type agreements are often used. These instruments work by the investor providing funds immediately, with their conversion into equity occurring only in the future upon the fulfillment of a defined event.

In the Czech legal environment, SAFEs do not have direct statutory regulation, and therefore they are structured as innominate contracts with a condition precedent of future share subscription. It is essential to set up the share table (Cap Table) so that the founders remain motivated in the long term by a significant equity stake.

Liquidation preferences, anti‑dilution, and protective provisions

The key protective mechanisms that investment funds standardly define in shareholders' agreements (SHA) are liquidation preferences, anti-dilution protection, and protective provisions. The market standard is a 1x non-participating liquidation preference, where the investor has the right to receive their invested amount back preferentially before others.

Anti-dilution protection protects the investor in the event that the company raises additional capital in the future at a lower valuation – a so-called Down Round. In practice, two methods of calculating this protection are applied: the stricter Full Ratchet and the fairer Weighted Average.

Protective provisions consist of a catalog of key decisions that the company's management or the general meeting may not make without the prior written consent of the investor. Typically, these include changes to the founding documents, the issuance of new shares, approval of the annual budget, or disposal of key intellectual property.

Governance, board seats, and venture debt

The Shareholders' Agreement (SHA) regulates the corporate governance of the company in detail. The standard is that, alongside the directors, a supervisory board is established, in which the investor has the right to occupy a defined number of seats. For deep‑tech projects in later stages of development, so-called Venture Debt can be an interesting financing alternative. This is a specialized loan instrument combined with the issuance of warrants to acquire shares in the company under favorable conditions.

Venture debt allows extending the financial runway to the next investment round without the need for immediate dilution of the founders' shares, but it brings strict contractual covenants, the violation of which can lead to the immediate maturity of the loan.

How a fund for deep‑tech projects works from the perspective of both investors and founders

The functioning of an investment fund for deep‑tech projects is defined by strict contractual relationships between its founders (GPs) and investors (LPs), as well as the external regulatory framework of the CNB and European law.

Investor's perspective (LP): return, risk, and regulation

By entering the fund, the investor (LP) commits to providing capital upon the manager's request (Capital Call) up to the amount of their total investment commitment. Investments in deep‑tech funds are highly illiquid – capital is locked in the fund for its entire lifespan without the possibility of early redemption. On the other hand, European legislation substantially strengthens investor protection. The AIFMD II directive introduces stricter rules for risk management and fee transparency.

For so-called loan-originating funds, European legislation sets firm limits on leverage and the obligation to retain a risk share. For investors in the Czech Republic, investing through funds of qualified investors (FKI) brings significant tax benefits. If the fund meets the statutory conditions of a so-called basic investment fund, its income is subject to a preferential 5% corporate income tax rate.

Founder's perspective: what to realistically expect from the fund

The relationship between the startup and the fund does not end after the investment is made; on the contrary, it begins. Founders must expect that a professional fund will require strict financial and operational reporting.

The fund also actively helps with building strategic partnerships, recruiting key employees, and preparing for subsequent, larger investment rounds. Founders should keep in mind that while the fund's representative on the board is meant to help the company grow, they also have legal duties to the fund itself.

In the event of conflicts of opinion regarding the company's strategy, tension may arise, which must be addressed in advance by clear deadlock resolution mechanisms.

Regulatory and contractual nuances to watch out for

Investments in technological and scientific projects with them carry the necessity of navigating highly specialized legal regulations that go beyond the scope of standard commercial law.

AIFMD II, ZISIF, and changes in recent years

The AIFMD II directive, which member states are to implement by April 16, 2026, brings a fundamental harmonization of rules for managers across the EU. The fund manager must demonstrate in detail to the CNB that they possess sufficient personnel and technical resources in the home country. At the same time, rules regarding conflicts of interest and asset valuation have been tightened. 

Managers must have independent processes in place for valuing illiquid assets, with valuation being performed at least once a year.

In the domestic environment, it is necessary to constantly ensure strict compliance with anti-money laundering (AML) rules. Fund managers and registered entities must perform thorough customer due diligence (KYC), identify ultimate beneficial owners, and verify the origin of funds.

Foreign investment screening and sensitive sectors

For deep‑tech startups that develop technologies usable in critical infrastructure, cybersecurity, energy, or have the character of dual-use goods, it is essential to take into account the Act on Foreign Investment Screening. If a foreign investor (based outside the EU or EEA) plans to acquire direct or indirect influence in a Czech company operating in a sensitive sector, the transaction is subject to approval.

In the event that a foreign investor plans to acquire influence in a Czech company operating in a sensitive sector, the transaction is subject to approval by the Ministry of Industry and Trade of the Czech Republic. Executing an investment without this prior permission is associated with the risk of invalidity of the entire transaction, the imposition of high fines, and the obligation of the investor to forcibly sell the share.

Therefore, the Czech legal team at ARROWS law firm verifies during due diligence whether the target startup falls under the scope of this Act, and if necessary, ensures the smooth progress of the approval proceedings.

Tax and cross-border aspects

When structuring international investments, it is necessary to consider tax implications in several jurisdictions simultaneously. A key topic is the avoidance of double taxation on dividend flows and capital gains upon exit.

In the Czech Republic, income from the sale of a share in a subsidiary is exempt from income tax for the parent company under statutory conditions (in particular, a share of at least 10% held for at least 12 months, Section 19 of the Income Tax Act), which is a major advantage for holding and fund structures. For individuals, to exempt income from the sale of a share from tax, it is necessary to meet a time test, which is 3 years for shares (akcie) and 5 years for ownership interests in an s.r.o.

Conclusion

Investments in scientific and deep‑tech startups represent a fascinating segment of the capital market with huge growth potential, but also with extraordinary complexity. Success in this area requires absolutely precise contractual setup, deep verification of intellectual property rights, and strict compliance with constantly tightening financial regulation.

For startup founders, fund managers, and investors (LPs) themselves, even the slightest formal error can mean fatal financial losses. Any error in license agreements, violation of the ban on public offering, or omission of foreign investment screening can result in the frustration of the entire transaction.

The Czech legal team at ARROWS law firm has long specialized in transaction and regulatory law in the field of venture capital, establishing fund structures, and protecting intellectual property. If you are planning to establish an investment fund, enter a startup, or transfer technology, do not hesitate to contact our specialized team at consultation@arws.cz.