Venture Capital Firms Behind the Hizook 2011 "VC in Robotics" List

Like many readers of this site, I’m planning to start a robotics company.  So when I saw Hizook's list of VC Funding in Robotics in 2011, it cried out to me: Who is investing in robotics?  And how can I get some of that VC money?  I did a bit of research to identify the robotics-friendly venture firms behind Hizook's list, with the hope of understanding how capital is allocated in robotics.  Unfortunately, most robotics investors are following a healthcare, consumer, or some other industrial hypothesis and end up investing in robotics by accident, not because they are eager for robotics per se.  As a result, the list is probably not as much help as a guide to fundraising as I had hoped.  Still, I think my research and results may be helpful to other budding robotics entrepreneurs... so many thanks to Hizook for letting me share.

 

Methodology:

 

Using Travis’s list as a jumping off point, I used CrunchBase extensively and tried to do all the website and Google searching that my limited attention span would allow.  This gave me the rough set of notes (Table 2), which I refined into a nice list of “VCs” that you see below (Table 1).  I make no warranty of completeness, as researching transactions between private entities is notoriously difficult.  I used only sources available on the internet for free, eg. as reported in selected S-1 filings or in media around an acquisition. If you can correct any of my omissions please add your information in the comments below and I will update the article.

 

Table 1:

 

Okay, Enough Already.  I’ve peeked at Table 1, but who are they, really?  And why did you just use scare quotes on “VCs”?

Here is what I saw:

  • Only a few of the high profile names in venture capital are on the list.
  • There is no concentration of funds investing in robotics.  Only three firms appear on the 2011 list with two different companies. Looking at robotics success stories, there were almost no funds that were repeating their investments in robotics.
  • Many of the funds that participated in, or even led the rounds, were not what finance geeks would call "VCs."  There are bunch of entities on the list that seem to have different models and ownership structures than a traditional VC firm.

 

So what? What does that mean?

 

Missing the Prestigious Funds

 

Very few "high profile funds" (with track records of producing extraordinary returns) are represented in this list.  Frankly, these funds just don't recognize the (spectacular) upside in robotics.... yet.  I can imagine a few reasons why:

  • Robotics technology and entrepreneurs could be creating wealth slower than alternatives with the same level of risk.  This is somewhat likely, since there are only a tiny number of robotic start-ups compared to web, green energy, or mobile start-ups.  Furthermore, web and mobile (in particular) have very low initial capital requirements and no manufacturing or supply chain issues.
  • Venture partners could just be unfamiliar with robotics.   Perhaps they are not able to evaluate the risks in robotics, and this is holding them back from investing.
  • VC firms may not yet have the skills and connections necessary to help mature robotic companies.  This is exremely likely.  Venture firms generally assist portfolio companies as they mature, thereby adding value that can justify large returns on their investments.  Without robotics skills and connections, VC firms may not be able to nuanced assistance to robotics portfolio companies.
  • There may be differences between growing a robotics company and an information technology that create inefficiencies in the capital structure that we haven’t learned to overcome yet.  The preferred equity instruments that VCs typically use matured over a long period of time to resolve a whole host of issues, particularly in companies that produce products with no marginal costs (software, websites, pharmaceuticals, etc.).  Perhaps robotics companies have frictions that VCs haven’t developed instruments to overcome.   Particularly if it takes robotics companies longer to mature, VCs might need different kinds of assurances than they do in other types of technology.

 

Concentration of Investment (or lack thereof)

 

I’m concerned that we’re not developing a cadre of investors who intimately understand the robotics industry.  Of the 37 funds identified as investing in robotics last year, only three invested in two companies (none invested in three or more) and only one is repeating from a previous robotic success.  Plus, the repeat investor seem to be investing along some kind of industrial hypothesis as opposed to investing in robotics per se.

The Foundry Group invested in both the consumer robotics plays that got funded last year, Orbotix and MakerBot.  Consumer web products is a specialty of the Foundry Group, so they are not playing too far from home, by adding unique, low-cost hardware.

Draper Fisher Jurvetson and their Mid-West affiliate invested in two of the more industrial companies, Aethon and Heartland.  Their hypothesis is to seek out clear business opportunities where capital is under-allocated both technologically and geographically. 

Bezos Expeditions went with the "making stuff" angle in Heartland and MakerBot.  This might be an angle for Bezos, but the other things that Bezos Expeditions funds—such as fusion company, charitable causes, and a 10,000 year clock—make me question whether this is so much an investment hypothesis as a personal interest of the founder.  Bezos Expeditions may not be required to generate the same degree of financial return that funds with outside investors must.

Trident Capital is the only fund repeating from a public robotic success, now in healthcare with Aethon.  I’m not exactly sure how iRobot and Aethon are related, since Trident now lumps Aethon into its healthcare practice, but there must have been something attractive in the deal.  Even the successful investors are not building repeatable practices in robotics investing, but treating robotics as a unique complication of some other kind of deal.

 

None of these investments seem to have been made with a specific filter for robotics the way that there are VCs dedicated to web, mobile, green tech, and biotech.  We need to start getting more repeats and more experienced investors that can start solving some of the unique challenges of robotics investing.

 

Other Types of Institutions

 

Robotics definitely captures the imagination and clearly can create great value for society.  However, it seems like in robotics entrepreneurs quest to raise capital, they look further afield than the straight VC route.  This indicates that robotics is still an immature industry that does not have an established default capital structure.

ABS Capital made the largest investment by a single fund on the list into RedZone.  However, I’m not sure that I would call ‘late stage growth’ who aim for 25% returns in their companies venture capitalists.  The distinction here is the VC model is predicated on 50-80% of all investments failing and the remainder performing spectacularly with 50%+ annual returns.  Growth equity firms on the other hand need failure rates less than 10% but only require returns in the 20-30% range.   In the end, both of the strategies net the fund’s investors about the same amount (and well above the public stock market if things go well), but the tolerance for risk is very different.  ABS’s investment in RedZone signals that ABS believes that RedZone is now a mature company with a proven business model, management, and technology—all it needs is to grow like crazy.  Ostensibly, this is what ABS knows how to help companies do.  The entry of this kind of investor into robotics is a very positive sign.  It also confirms that companies are putting together one-off financing with funds that don’t understand robotics specifically.

The Pittsburgh Life Sciences Greenhouse and the Massachusetts Technology Development Corporation are both state affiliated development corporations which are aiming to develop their local area ahead of producing outright financial returns.   Government capital will probably remain part of the mix in robotics companies for a long time to come, while this isn’t the sexy way to do it, I think entrepreneurs should take every opportunity that gets them closer to their goal.

Schlumberger is the 800 pound gorilla of oilfield services.  Getting corporate investments in robotics is good.  Honestly, I believe that corporate financing will become the leading way to build robotics companies.   Corporate investors are financially motivated investors who can consider both the financial and strategic value created by their investment.  Intel Capital’s investment in Aldebaran may also fall into this category.

Techstars was the only incubator I found supporting a company on the list.  We will probably need more of this and specialized ones to help with the unique engineering requirements of a robotics company.  But in the meantime we should applaud techstars.

Eagle Capital is another example, along with Bezos Expeditions, or a kind of super angel investor.  That is an investor that is not organized as a close ended fund where the investors commit to the fund, but a platform for individual investors to make bigger investments.  Although VC is sexy, angel investors are much more important than they are popularly given credit for.  This an area where further research would be very welcome, though if you think finding information on VC’s is hard—good luck with angels.

 

What can we do to become an established industry?

 

There are several steps that I believe that we could take as an industry to promote the regular and efficient creation of new robotics businesses.  

  • Educate the investment community: We need to make the financial community and the financial press aware that there are lots of people making money in robotics.   Some coaching is probably required to help them come up to speed.
  • Have successful robotics entrepreneurs re-invest in the industry: These are investors with built-in expertise who could signal to the larger financial community that these investments are worthwhile.  Their efforts will go a long way towards bringing the larger financial community into the robotics industry.
  • Create dedicated robotics incubation: I’ve heard of several attempts to start doing more incubation of hardware or create virtual robotics incubation, but I think that an incubator that had a machine shop, test stands, and maybe even a shared low-volume production capability would go a long way towards decreasing the cost to enter the robotics market.
  • Solve the challenges of the unique frictions in the robotics industry: There are several challenges in the robotics industry that have not been solved.  The biggest is that it seems that it takes much longer to grow a robotics company than a similarly sized software company.  But there are probably others that have not come to light with sufficient clarity yet.  This means that there is no default path for creating a company.  An innovator can’t just go to an investor with a proven innovation and demonstrated market interest and have the investor say, "Great!  We know how to build the business around this.  Let’s go."

 

 

This is the right time to be entering robotics

 

I hope that this analysis has added some nuance to the picture of robotics investment.  I personally believe that this is the right time to be entering robotics.  The fact that we can identify most of the challenges to robotics investing, but we’re still working on solutions, means that there are vast benefits to humanity to be unlocked and vast fortunes to be made.  It is important that we solve the financial challenges to creating robotics businesses or we will never have the capital to build the amazing, Jetsons-like, robotically enabled future that we can all envision.  

 

Table 2:

 

 

Robert Morris is a former Army officer who led the first RQ-7B Shadow (UAV) platoon in Afghanistan.  Subsequently, he consulted to the Navy, primarily on unmanned systems issues, with Deloitte Consulting.  He is currently pursuing graduate studies at Carnegie Mellon University and serving as the chapter president of AUVSI-Pittsburgh.

 

Comments

Small group investing early in robotics startups

 

Hi Robert

Great post. I was also intrigued by Hizooks post last year.

I and a few friends actually invest in startups. We see the huge potential in robotics, and we are actively looking for opportunities in the area. (We are already looking into a few opportunities.)

We got started in investments when I found a small greentech company a few years ago. I liked it and so did the group, so on that note we started.

Although we cannot provide millions of dollars, we do invest early, and aim to be a good long term partner (smart, hardworking And nice money)... :-)

So if you, or any of Hizooks readers have interesting projects, you are more than welcome to get in touch:

per@flexibilityenvelope.com

www.flexibilityenvelope.com

—Per Sjoborg

@Per: That's awesome.  As the robotics industry matures, it would be really cool to see an "AngelList for Robotics."  I would join as an investor...

Unfortunately, I don't currently meet the accredited investor requirements: $200k income per year or $1MM in net worth (excluding primary residence).  I gave up too much opportunity cost to go to grad school (and now, doing a postdoc and pursuing my own startup endeavors).  Oh well, I'm content with my choices.  I'll get there eventually!  

Besides... if anyone is interested, I can certainly participate in other value-add ways: making introductions, helping with PR, or even joining you as founder, employee, or advisor.  Just email me!  ;-)

I think there's also a lot of room for KickStarter-like efforts.  These are still (effectively) based on a pre-order system, so they aren't an investment at all.  As crowdsourced investing takes off, that might all change.  But for right now, it's probably a bad idea for both companies and investors -- the details are still hazy (ie. later stage VCs are weary of providing follow-on funds until the mechanics of crowdsourcing are figured out). 

—Travis Deyle

Thoughts on Robotics Incubators using Hackerspaces and "Shared Labs"

Robert mentioned, "I think that an incubator that had a machine shop, test stands, and maybe even a shared low-volume production capability would go a long way towards decreasing the cost to enter the robotics market."  I think this is spot-on.  In fact, I think we're already starting to see this happen a bit on an informal level via "mini robotics hubs" and "hackerspaces."

Consider the trio of hardware companies out in Boulder, CO: SparkFun, Orbotix, and Modular Robotics.  There seems to be a lot of cross pollination between these companies.  SparkFun was the first of the three (bootstrapped, IIRC).  They're leaders in the DIY hardware (electronics) community, and they've built a lot of expertise in in-house hardware production (eg. pick-and-place) that is now replicated across the US.  Anyway, SparkFun CEO (Nathan Seidle) is very involved in the local tech scene, particularly the robotics outfits -- as an advisor of Modular Robotics and "helping out" at Orbotix.    Now, these two robotics companies are forging ahead with mass-market products rather than in-house production (via venture funding), but I have to imagine that having the local DIY expertise and cross pollination was extremely beneficial early on.  I think this model could be replicated all across the US, and robotics-centric incubators (even if informal) will happen.

I think there's a good chance the robotics incubators will form around hackerspaces and shared labs.  I had a chance to visit the RDU Tech Shop the other week.  I was impressed with the number of tools and resources they had available to members... but I was even more surprised to hear about the number of startups located on the premises.  Apparently, the Tech Shop rents out space for local design and fabrication (eg. contract manufacturing) startups. These will almost certainly feed off each other, and they could be a great resource for entrepreneurs and investors alike.

—Travis Deyle

There's a nascent incubator in Minnesota called the Global Robotics Innovation Park.  Their website is http://roboticsinnovation.com and they've got space and support to help robotics businesses get started.

—Signered

Hi, I´m interested in learning more about different investment opportunities in the Robotics Industry.

I stronlgy believe this will be a growing industry and I hope to find some good companies to support. I also have a bunch of friends may want to invest as well so would be great to listen to some ideas. Investments could range from 250k-5M us$ depending on the stage of the company

You can learn more about our group visiting costapartners.com.

Looking forward!

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