Despite the expectations of past science fiction writers, robots are still far from common in our everyday lives, notes the venture capitalist community. More than a fifth of the 21st century has now passed, and the worlds of The Jetsons and Lost in Space still feel like projections of a distant future.

However, away from the domestic lives that most of us inhabit daily, robots have suddenly become pervasive in some industries. Self-driving cars are moving from research labs to the road, Boston Dynamics continues to release incredible video demos — and many investors are starting to take notice.

What has changed to drive this acceleration in both the technological capability and deployment of robotics? Venture capitalists see three key factors:

1. Labor costs continue to rise and are now 45% above 2000 levels.
2. The cost of robotics components has dropped, so innovators can piece together existing platforms and spend more time focusing on the truly groundbreaking elements of their technology. For example, the cost of a robotic arm has fallen 90% since 2000. In business speak, this means nobody has to “reinvent the wheel” every time they want to build a new robotics solution.
3. Software has advanced to the point that it can support robotics technology with complex tasks, buoyed by a 400% increase in AI investment over the past five years.

 

Where the Money is Flowing

The robotics space changes rapidly, with constantly rotating “hot sectors,” tweaks to business models, and shifting investment and exit dynamics. To better understand the industry landscape, F-Prime Capital recently completed a comprehensive analysis of more than 1,250 robotics companies that raised funding over the past five years.

In the resulting report, we found that $90 billion worth of funding had gone to the robotics industry since 2018, representing roughly 10% of overall investments in tech.

We identified three main categories for robotics investment:

Autonomous vehicles — public roads only

Vertical robotics — use-case specific and mostly focused on industrial settings

Enabling systems — hardware and software components that others can use to build complete solutions

Autonomous vehicles (AVs) accounted for more than 50% of robotics funding in most years. However, as investors began to question the paths to commercialization for many companies in the sector, AVs saw a stark decline in 2022.

Vertical robotics companies now take the majority of venture funding available for robotics technology. Within this, logistics, defense, medical, and manufacturing applications tend to attract the most investment capital.

However, as we’ll discuss below, the fall in investment that began in 2022 is on track to continue through 2023.

Another way to trace this shift in focus from AV to vertical robotics is to observe the types of unicorns that have emerged in the space. The 2018 and 2019 crops of robotics unicorns clustered in the AV and enabling lidar space — several of which have since shut down — while the 2021 and 2022 crops tend to center around vertical robotics.

This year has been challenging for startup fundraising, and robotics is no different. The first half of 2023 saw investments decline more than 50% relative to 2022, which itself was down 30% from the heights of 2021.

Fortunately, the second half of 2023 is looking more promising, with several high-profile funding rounds for companies like Anduril, Aurora, and Stack AV.

A deeper dive into the funding environment, however, shows a wide range of behavior by stage. Early-stage deals have shown a relatively modest decline in 2023, whereas mid- and late-stage deals have been far more challenging. This is largely attributable to overvalued earlier-stage companies that raised at the height of the market, which are now facing valuation expectation mismatches when they re-engage investors for their next round of funding.

The exit environment has also created challenges for robotics startups. IPOs and SPACs have ground to a halt in the past 18 months, while mergers and acquisitions are down 50% since 2021.

However, even in the best of times, the vast majority of M&A deals since 2018 have been worth less than $250 million, with only a handful of notable exits. Among them: Auris’ $5.75 billion acquisition by Johnson & Johnson in 2019, and Uber ATG’s acquisition by Aurora for $4 billion in 2020.

Public market performance has also been mixed, with robotics companies that have built scaled, high-growth businesses faring best — Symbotic, AutoStore, PROCEPT Biorobotics, and Hesai Technology are the standouts here. For others, valuations have significantly reset.

 

What’s next for venture capital and robotics?

The boom in autonomous vehicle investment catalyzed a new generation of robotics entrepreneurs and engineers. They are now using that know-how to build startups that solve real customer pain points.

As venture capitalists, we believe the industry remains in its early innings. Indeed, the exit environment is still maturing, and hardware businesses still face an additional layer of complexity compared to pure software businesses.

But for those with experience in the industry — and who understand its unique metrics and business models — it is clear that opportunity is growing at an accelerated rate.

Founders should be aware the era of exiting a business based on little more than “promising technology” is over — you must eventually build a real business. Tech demos do not equal commercial success, and investors have wised up to the fact that production deployments delivering measurable ROI trump pilot customers who are “excited by the technology” every time.

As demonstrated by the data outlined above, it’s also important to note that, for now, capital remains scarce. Founders must build capital-efficient businesses to entice investors. For many, capital efficiency, or a lack thereof,  can make or break a founder’s pitch.

Today’s robotics founders have several tailwinds at their back: technological acceleration, labor shortages, stagnant productivity gains, and a cadre of investors who are increasingly interested in the category. Those who can learn the hard-fought lessons of the past five years — including the experience of AV companies and the macro rise and fall in tech investment dollars — are well-placed to find success in this unique category.

 

Originally published in The Robot Report

Check out the full State of Robotics report here. 

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.