In June, F-Prime co-hosted Robotics Invest, an invite-only summit packed with keynotes, panels, and case studies featuring the robotics industry’s most experienced investors, founders, and operators. During her time there, Betsy Mulé took advantage of this unusual concentration of tech industry talent by interviewing several founders — Yaro Tenzer of RightHand Robotics, Helen Greiner of Tertill and iRobot, Rajat Bhageria of Chef Robotics, David Morczinek of AirWorks and David Johnson of Dexai Robotics — about the state of the industry.

Here, they discuss the technologies that are enabling the current wave of robotics innovation, and what the future of the industry might look like.

 

Recorded at Robotics Invest

Founders must learn the hard-fought lessons of the last five years to find success in this unique category.

Throughout the late 2010s and early 2020s, the autonomous vehicle industry captured the imagination of the startup community and the public. However, the category’s meteoric rise preceded an even more meteoric fall over the last 18 to 24 months. From 2018 to 2021, investments in the AV sector across the U.S. and Europe increased by nearly 2.5x, eventually peaking at close to $10 billion in 2021. Then, in 2022, investments fell to $4 billion, with 2023 likely to see further precipitous declines.

Meanwhile, the broader robotics ecosystem has continued to flourish, with companies focused on mostly industrial “vertical” use cases now commanding the bulk of investment dollars. In 2022, these companies attracted $7 billion in investments, defying the broader slowdown in VC investment by growing 15% over the previous year.

We recently analyzed the trends shaping the industry in our State of Robotics report, and identified five lessons that the next generation of robotics founders can take from the successes and failures of the AV industry.

 

VC excitement for hardware businesses is higher than ever

In the U.S. and Europe, more than $60 billion have been invested in robotics and AV alone over five years, with the AV sector leading the way. AI is making hardware much smarter, which is enabling companies to generate the kind of high-margin recurring revenues typically associated with software businesses.

AI also creates opportunities to disrupt traditional industries with massive addressable markets. For example, across the logistics ecosystem, AV companies such as Aurora are disrupting the trucking industry, while companies like Locus and RightHand Robotics (an F-Prime portfolio company) are transforming how fulfillment operations are done.

For founders, this surge in interest means there are more robotics investors than ever, ranging from newcomers in the category to those with an extensive track record in the space. Even top-tier investors such as Sequoia and Andreessen Horowitz are starting to make investments in the category, an encouraging bellwether for overall VC interest in robotics.

Nevertheless, hardware-oriented investments are not the right fit for all investors, and it’s best to seek out those who have made a commitment to robotics and understand what it takes to be successful.

 

You must eventually build a real business

Much of the early effort in AV focused on technology development, and success was defined by performance of demos and pilots. However, pilots are not the same as commercial success. As both acquirers and investors realized the challenges of creating self-sustaining AV businesses, capital started to dry up and many companies shut down or were forced to scale back their strategy.

Today’s robotics founders must focus on real commercial proof points at every phase of their journey. Investors want to see production deployments that deliver measurable ROI (return on investment). Pilot customers who are “excited by the technology” are very different from customers who are motivated enough to manage the operational changes required to adopt it and demonstrate high utilization.

At the same time, founders must demonstrate attractive unit economics associated with their offering — for example, more than 70% gross margin after subtracting BOM (bill of materials) and support costs from lifetime revenues.

 

Use case selection matters

Early efforts in AV targeted the largest, most challenging problem: generalized autonomy on passenger roads. While the TAM (total addressable market) was massive and the use case seemed like the obvious one to target, technology challenges and uncertain timelines ultimately led many players to pivot toward more tractable use cases, such as trucking and delivery. Lots of capital was burned in that transition, and as investor interest waned, many companies did not survive.

Founders must identify use cases that have real value and that can be realistically automated without massive capital investment. Many companies are now pursuing use cases in constrained operating environments with greater fault tolerance, and often with a human-in-the-loop element, which creates more technical feasibility. Identifying such use cases where the TAM is still significant is the sweet spot for a VC-backed robotics business, often requiring founders to have a deep understanding of the target industry.

 

Acquisition and exit activity drives a virtuous cycle of investments

GM’s acquisition of Cruise for $500 million in 2016 sparked the AV race. The deal made the startup community realize AV’s disruptive potential in the eyes of incumbents, and how much capital they were ready to invest in the acquisition of technology. The ensuing years saw annual AV investments take off, the creation of 10 AV unicorns, and large IPOs or acquisitions for companies such as Aurora, Zoox, and Uber ATG.

The lesson for startups is that large incumbents can propel investment momentum and help overcome investor reluctance around what may be a still-unproven use case. Investors will look to incumbents for validation of the problem statement, and many incumbents are starting to actively engage startups for exactly this purpose, like John Deere’s Startup Collaborator and Suffolk Technologies’ BOOST. If your startup is able to drive real customer value and disrupt legacy business models, incumbents will eventually come calling, even if they are not yet active acquirers. Investment dollars will follow, more incumbents will jump in, and startup formation will accelerate.

 

Only the strong survive

AV businesses were very capital intensive, and as investments ebbed, only the strongest players were able to continue raising capital. Even companies such as Argo AI, with more than $1 billion of capital, were ultimately shut down, whereas Aurora was able to raise an additional $820 million as recently as mid-2023.

Founders must focus on being the winner in your chosen segment or use case. There will inevitably be competition for any good idea, and those startups will often find willing early-stage investors to support them. However, being an “also-ran” is ultimately a losing strategy in robotics. Later stage dollars will flow disproportionately to the winner, customers will favor the most established providers, and acquirers will focus their efforts on the market leaders.

Today’s robotics founders have a number of factors on their side: technological acceleration, labor shortages, stagnant productivity gains, and a cadre of investors who are increasingly interested in the category. However, founders must learn the hard-fought lessons of the last five years to find success in this unique category.

Originally published in TechCrunch. Read the full story here.

Check out our State of Robotics report here.

Sanjay Aggarwal reflects on our inaugural Robotics Invest summit

Co-authored with Fady Saad of Cybernetix Ventures

The ideas outlined below come from the panelists, as summarized by our team taking notes on the day. To stay in touch, follow Robotics invest on LinkedIn and Twitter. 

Last week, we welcomed some of the robotics industry’s leading entrepreneurs, investors, and operators to Boston for Robotics Invest, an invite-only summit packed with keynotes, panels, case studies, and robot demos.

We were very intentional in curating the speakers in these panels and, judging from the overwhelming response in the room, these discussions delivered. We’re extremely grateful to all our panelists for sharing their wisdom and experience with the group.

While the event itself was oversubscribed, we wanted to make sure everyone had the chance to access the insight, experience, and tactical advice that was available throughout the day. Luckily, our team was on hand to take notes. Here, we’ve summarized the key takeaways from each Robotics Invest panel conversation.

 

Robotics as an Investment Class

– Robotics sits in between two ends of the spectrum in the investing community: SaaS and biotech. This means that investors might look at robotics companies with a lens that may not fit, and try to optimize for metrics or markers for success that aren’t relevant for this category.

– Likewise, robotics companies often don’t follow the typical growth trend of your average SaaS business. For example, Kiva Systems spent three-to-four years with flat growth before it really took off.

– We are still in the early days of robotics investment, especially when compared to the SaaS sector. The labor shortage is a secular issue, and the economy requires automation to keep up GDP growth.

– A solution’s lifetime value is an important metric in robotics, after factoring in capital and operational costs. Only looking at year-by-year margins may tell the wrong story.

– We are starting to see an evolution in financing models, which includes availability of equipment financing, which is helping to mitigate the capital costs of hardware.

– Revenue benchmarks aren’t as important for robotics companies at the Series A stage, nor is LTV/CAC. Instead, investors are looking for evidence that customers are moving beyond initial pilots and deploying the systems in production and at scale.

 

Building Product, Manufacturing & Supply Chain Strategies for Scale

– To succeed, robotics companies need to build great applications at the right time. For example, companies had tried to build cleaning robots in the 1990’s but the timing wasn’t right. And while matching macro conditions to the tech and value proposition is key, robotics companies should not let perfection trump a solution that’s “good enough.”

– Your first two hires should be a subject matter expert who can build the technology, and a subject matter expert who deeply understands the problem. Your first sales hire should be able to roll with the inevitable bugs and customer success issues, and be willing to go on this journey with you.

– Understand your technology’s core competency and be able to do that in-house. Everything else is an opportunity to outsource. However, you need to be careful about which tier of contract manufacturer you go with — if you don’t have a level of mind share with them, it can be hard to maintain the quality of your end product.

– Identify what’s essential and build it — over-engineering solutions is a common issue that can lead to cost escalation. It’s easier to add a feature in the future than take it away to reduce costs.

– There are a number of advantages to a Robotics-as-a-Service model. Reducing the capital intensity of an up-front sale can accelerate deployment, and you get a lot more customer engagement through the RaaS model. When a customer is evaluating your service’s value on a regular basis, you get a certain baseline of customer engagement.

 

Building a GTM Strategy for Scale

– Robotics startups should be talking to and incorporating the feedback of customers on day one. The transition to asking for payment can be tough and industry dependent — for example, contractors tend to pay their subcontractors when the job is done, and will not pay up front — so a pilot is usually necessary.

– Sales tend to fall apart when startups overpromise. Your timing needs to be realistic, and you must provide support over the longer term.

– The systems integrators flywheel can take a while to get going, and it’s not right for every use case. Startups at the very early stage should work directly with customers for design iteration. When you’re ready to deploy 10-99 units, a smaller system integrator (SI) can help customize the solution. And when you’re selling 100+, you’re ready for a larger SI like Dematic, Schaefer, or Honeywell.

– Lock-in long lead times on your supply chain early, and then design around them. You also need to be flexible and creative on how you source — for example, second-hand markets can be invaluable. As a general rule, designing around your supply chain up front can solve a lot of problems.

– Not all growth is good growth. The number one thing autonomous mobile robotics companies should work towards is a high number of customer relationships, and how you can expand the profitability for each. In other words, land-and-expand is critical.

 

Raising Money from Later Stage Investors

– The later stage is less aspirational than the early stage. The early stage is about selling the sizzle — the later stage is about selling the steak.

– Valuation matters, but it’s more important to focus on getting a fair valuation based on a business’ metrics, results, history, team, and other factors, rather than squeezing out the last dollar.

– Presenting realistic numbers is better than presenting spreadsheet projections that don’t make sense. Investors would rather see a credible number than an outsized revenue projection.

– Units matter more than revenue. Having credibility with customers and executing against your commitments matters, because it’s not just one transactional event.

– Investors want to be convinced that they’re investing in a team, not just one person. So showcase the team and let them present and answer questions during diligence.

– Diligence for later-stage investments involves talking to customers and getting conviction from them about whether they will do what the company says they will. Procuring customer references through videos or visits is a scalable solution here.

 

Role of Corporates in Start Up Innovation Landscape

– Corporates can provide access to markets and distribution networks, and build trust in early-stage companies by putting their weight behind their product and brand. However, startups must clear high risk and benefits bars during the evaluation process to land a potential partnership.

– FOMO does not necessarily enter into the equation, but if there’s a deadline to meet, the team will try to meet it as fast as possible.

– Large corporates have integration teams responsible for combining new technology into the company after mergers or acquisitions, while smaller companies may assign temporary teams for this task.

– To maintain relationships with corporates through different team members and priorities, early-stage companies should focus on key advocates and sponsors while also branching out to other stakeholders within different teams and functions.

– Corporate venture capital investments can offer access to expertise that would otherwise be costly, and accelerate regulatory timelines.

– Manufacturing experts from large corporates can help reduce costs by renegotiating contracts, playing hard ball with suppliers, and identifying alternatives.

 

Exiting a Robotics Business

– When it comes to exit strategy for startups, good communication channels are key in keeping options open. Founders should be proactive and keep everyone updated quarterly.

– Opinions are mixed on strategic investors. If you get the right partner, it gives your business model some validation. However, you want to limit your involvement with strategics if you have lots of options, as you don’t want to be limited to a single acquirer. Bottom line: either have multiple strategics on your cap table, or zero.

– The lifecycle of a robotics company can be up to 20 years, so plan for the long game.

– Personal relationships between board members and CEOs are more important than anything right now. A good board will have consistent and easy-to-pitch messaging for potential investors.

– The use of robotics is a long term secular trend that will not stop, and is accelerating with broader adoption and understanding of AI and machine learning.

 

To stay in touch, follow Robotics invest on LinkedIn and Twitter.