VC Investment in Robotics – Is There an Emerging Recipe Book?
MBAs for Robots?
Many leaders spend at least some time wondering what the next ‘big thing’ is, and whether they can apply their talents in whatever this emerging new field is as a Venture Capitalist or even as a corporate ‘intrapreneur’. And few can have escaped the growing coverage of the ‘rise of the robots’, with increasing public awareness of the potential implications for the economy and society of mass deployment of robotics in the economy in terms of productivity gains, job losses and changes to modes of doing business.
I provide here an account from a venture capitalist perspective. Why is Venture Capital (VC) investment relevant to the broader economy? VCs are generally seen as firms of professional investors providing equity finance to high-risk/high-return companies, often deploying a new technology or business model innovation. Hence growth in VC investment can be seen as the harbinger of new technologies and business models as they are about to hit the mainstream and transform the economy at larger. They also attract many of the brightest minds of a generation! Previous VC industry booms such as in semi-conductors (1980s), biotech (1990s/2000s), Internet 1.0 (1990s), mobile and sharing economy (2010s) saw the entry in the mainstream economy of a raft of businesses that transformed their relevant fields.
A takeoff in VC investment is not automatic, and it requires more than scientific or technological maturity and the right market conditions. After all, robotics have been in the factory for a long time. In my view, a take-off in VC (or other) investments in any area requires the emergence of an investment and startup growth ‘recipe book’ that can be applied across a wide spectrum of applications time and again. The robotics field is about to hit this point.
VCs have woken up and smelt the robo-coffee. A bottom up estimate shows close to $2bn in VC investments for 2016, up from approximately $1.3bn in 2015. Yet clearly this is still a developing space, in that there are as yet not many ‘unicorns’ (the $1bn+ valued companies that entrepreneurs and VCs dream of), and the amounts invested still pale in comparison to startups in the Artificial Intelligence or connected transportation space (such as Uber). It is not yet clear to investors what may be the winning ‘formula’ that would enable a scale-up of investment flows in the robotics space. Yet 2016 has emerged as a headline year for robotics acquisitions, with 50 companies sold with a combined transaction value of over $19bn. Notably, the first “mega-exit” in the space was completed – Germany’s Kuka Robotics sold to China’s MIDEA Group for $5.1bn. The investment case for robotics companies is crystallising.
Figure 1: A Q-Bot Survey Bot for examining complex building environments
Economic history is full of examples of how the emergence of a new technological paradigm leads to evolution or disruption of winning business models. History also shows that such changes can happen quite fast if fuelled by capital (think electrification, rail, automotive, semi-conductors, E-commerce, sharing economy, and so on). So, if we see robotics as a technological paradigm that is in the early stages of diffusion, then we can expect lots of enabling applications to emerge around this technological paradigm, with shifts in the way of existing patterns of doing business, and even institutional and policy change to adapt to the greater diffusion of robotic technology in everyday life and business. One key ingredient is an investment model appropriate to the technology opportunity to effectively monetise such opportunities. It’s nicer to call this a ‘recipe book’ than to use boring economist terminology, so I will stick with that.
Robot Startup Borscht – What’s the Recipe?
To stick with the metaphor, it’s clear that many different recipes are being tested right now – some more bitter than others. However, the rapid growth of VC investments makes it more likely that a set of winning investment recipes will emerge in the next 2-3 years, as failures and exits multiply. So it is worthwhile to take a look at the new wave of VC investment in robotics, as investors identify some emerging traits. Below is a list of some candidate recipe ingredients:
- Modularisation: the increasing modularisation of key robotics build components, such as off-the-shelf components, cheaper and more powerful sensors, and libraries of previous solutions
- Lean Startup: The use of robotics outside of the factory really opens up the use of Lean Startup methods, to rapidly develop the design of the product systems and commercial models that go with it – and cut time-to-market.
- Connectivity and IoT: the rapid growth of the Internet of Things provides robotic products with a connectivity infrastructure to plug into.
- Unmanned Vehicle Platforms: the vast number of unmanned vehicle platform types, whether ground, air or sea, are multiplying the application areas where a robotics solution may be feasible.
- Artificial Intelligence (AI): major advances in computing power and cumulative advance in AI fields including machine vision and deep learning are bringing down the cost – and speed – of development of new products.
Example: Q-Bot – your friendly Victorian house underfloor insulating robot
I will illustrate some of these factors with reference to Q-Bot, one of our portfolio companies in the robotics space. Robotic solutions are uniquely placed to enter and scale into multiple markets because of their ability to manage jobs that are too dangerous, complex, or boring for human operators. London-based Q-Bot is a great example of a robotics company that has built a robotic solution around precisely such an application problem. Q-Bot was started by Imperial College Prof. Peter Childs, and Imperial College graduates Mathew Holloway and Thomas Lipinski.Q-Bot develops intelligent robotic tools for the building industry and turns difficult, disruptive, tedious and dirty jobs into clean, efficient and safe processes. The company’s first commercial application is designed to perform underfloor insulation for aging Victorian properties (of which in the UK we have many!), and the company has now scaled to apply its technology more broadly in the building industry.
The recipe ingredients I listed above are all present, and I think key to the company’s growth. From the outset the team invested in rapid production in-house facilities including CNC machines and a high-end 3D printer. In combination with off-the-shelf products, this enables the company to rapidly build and iterate the design of a family of robots in response to real experience in the field. They have integrated a range of high-end sensors to provide an extremely intelligent solution for a very low-end area of building – enabling them to redesign the service package a client gets. Continuously improving machine vision computing and control systems provide the company with economies of scale and scope, as the system becomes ever more sophisticated on the back of real life experience.
Where are the big investment returns?
I see several opportunities for superior investment returns in the robotics space. Broadly speaking these are in end-user B2C products, components and solutions providers to the robotics value chain, and B2B robotics solutions providers. In the B2C space, followers of the industry are keen to find the robotics equivalent to the iPhone – that elusive package of cutting technology, design and ‘fit’ with consumer needs that can accelerate adoption. As the industry growth accelerates, and market uses increase, businesses who are able to place themselves as the providers of key components such as operating systems, artificial intelligence software modules, power drives and Internet of Things modules that help the industry scale will also provide significant investment return opportunities.
At EcoMachines Ventures, we see the most significant B2B opportunities in business applications that can service, or assist certain worker tasks or provide infrastructure support, via remote maintenance, monitoring or fixing components. We look for startups ‘hyperfocused’ on a specific market niche, where the integration of best in breed technology, and deep knowledge of a specific, real application with a high-payout can provide the basis of an exciting, high-growth business. Often the application may be in a relatively ‘boring’ business area, but this is where some of the highest potential for productivity gains – and investment returns – lies. We also look for capital-light models that make use of what’s already out there, and also for business plans that obsessively search for early cash flows as a way of validating market demand.
Imperial College Executive Education offers a programme in Strategic Information – Creating Sustainable Growth.
About EcoMachines Ventures
EcoMachines Ventures is a London-based investor and corporate finance advisor with global reach active at the seed through early growth stages of investment. Working as a strategic partner alongside successful entrepreneurs and corporate partners, we support and help promising companies accelerate through the next stage of their growth. Learn more at www.ecomachinesventures.com.
For more information contact: Dr. Ilian Iliev, CEO & Co-founder – firstname.lastname@example.org