As someone deeply passionate about the field of robotics for the past 15 years, I want to share my insights, delve into the current state of robotics, the challenges faced by startups in the hardware industry, and explore the future of this sector.
As a warning, this post may seem too pessimistic, a tangent from my extremely optimistic personality. But it is more of a reflection of reality that I have observed in my career and uncovered in my interactions with hundreds of people in the sector at all levels, and should be viewed as possible factors to keep in mind whether you are a founder or investor in the sector. So first, a refresher on my background.
I’ve loved electronics and mechanical since I was a kid. In 2008 I began my journey in robotics during 3rd year of CS Engineering and by mid-2012, fresh out of university with a Master’s degree in Computer Science where I did research into self-driving, SLAM, and Humanoids, I decided to pursue a career in the field but realized that the industry was fraught with numerous problems, having experienced many of them myself. Determined to overcome these obstacles, I embarked on what I called “Jasmeet’s Moonshot” – a personal mission to mold the hardware industry by solving the problems plaguing it and bring to life the vision I had conceived in 2008, a world brimming with robots and automation. Thus began a decade-long endeavour to create startups that addressed each challenge I encountered in the Indian robotics landscape. One-by-one these ventures continued to tackle issues with Accessing quality international hardware, Advanced skill development, R&D career development, Startup incubation, Prototype marketplaces, which allowed me to gain valuable insights into various business models surrounding the hardware and adjacent fields and bootstrap the whole ecosystem from $500. Back then, funding in hardware in India was extremely limited, and mainly in the industrial sector. Deeptech wasn’t even a word. So I started with creating businesses that would get me great cash-flow allowing me to invest profits back into other initiatives.
With my extensive experience in the commercial hardware industry, I have developed a keen sense for predicting upcoming trends and even creating some myself. In 2012-2013, prior to starting my own companies, I contributed a portion of my modest savings to the development of humanoid robots like Roboy and ATOM. Around 2015-16, I foresaw a shift that a lot of the educational startups in the hardware adjacent fields would plateau and research would rapidly start to happen within universities, startups, and corporates. By early 2019 I had a vision for what would happen when this phase ended. We are almost at the end of this research phase in 2023-24 and within the next 5 years if done right, we will see a meteoric rise in startups and rapid advancements that will be able to create use cases that see widespread adoption. Although robotics education companies still exist and research is ongoing, they will no longer be the driving force behind the industry’s growth.
During my travels from 2017 to 2019, and engaging in conversations with professionals across 13 countries, it became evident that the challenges faced by hardware startups were not unique to South Asia. At this juncture, I had a choice: either expand my cash-flow generating startups gradually into new regions through strategic partnerships to solve those problems, or focus on addressing the most significant obstacle that kills many hardware startups – FUNDING.
To be able to continue to make the impact I envisioned, I decided to transition to investing, to affect direction of the market, and even bought a domain name in Feb 2019 of what this would become.
State of Current Funding
Having served as a distributor of products, I witnessed firsthand the adoption of robotics and the factors that influenced decision-making processes, and being a dating coach with a massive interest in psychology, I paid closer attention to it than most. I even gained exclusive peeks into secret projects being developed by R&D divisions of conglomerates, university research teams, military, and future hardware entrepreneurs in tiny corners of local makerspaces. I wish I was an investor sooner and could have invested in companies I really liked but at the time I was busy focusing my energies on operating multiple companies to have time enough to even think of investing as an Angel.
Through my investments on crowdfunding platforms, and in working with many founders I honed my skills of identifying those who will succeed and those who are less likely to deliver what they promised in the early stages. Did you know technology crowdfunding campaigns have the lowest success rates (~20%) on Kickstarter w.r.t any other category and majority of the successful ones raise between $20K to $100K? Many campaigns on Indiegogo in this space have turned out to be scams, or people with a great idea who could not deliver on those ideas because they didn’t take distribution into account. Crowdsupply offers founders early adopters of hardware devices within the maker communities but widespread consumer adoption does not exist for many of them.
Understanding Failure of Hardware Investments
In recent years, we witnessed the failure of numerous robotics startups, even those that were well-funded, such as Rethink Robotics, Mayfield Robotics, Jibo, Anki, and many others specializing in social robots.
Startup founders in hardware continue to struggle in raising funding before Series-B due to several issues on both the startup and investment end. These problems can only be solved by an investor who deeply understands the technology at a core level so as to judge feasibility properly, can understand the founder’s vision, and can use their operator background to guide the founders in achieving that vision from Pre-Seed to Series-A stages.
There are several common factors contributing to these failures.
Lack of Funding
Securing additional funding to sustain operations poses a significant challenge for many robotics startups. For instance, Rethink Robotics, known for its Baxter collaborative robot, cited the inability to secure further funding as the reason for its closure. More recently, Karakuri faced a similar fate in June 2023.
Over the past 10 years, venture capital investment has heavily favoured software. Out of all VC firms in US and Canada combined, 13.2% invest in Hardware and AI in the early, (pre-seed to seed) stage which drops to only 8.5% in case of solely Hardware. Many of these also hedge their bets by investing heavily in software alongside hardware, being sector agnostic, or writing smaller checks into hardware due to lack of derisking strategy, therefore credible VC investors that prioritize hardware for follow on funding are scarce.
Most hardware startup cap tables at Seed are filled with Angels who love the sector as they are the ones who keep investing passionately into it. Angel networks and syndicates do an amazing job of investing in this field, but with the lack of a VC firm, and in many cases a lead investor on the cap table, most angels do their own diligence which ends up taking a lot of founder time to raise, sometimes more than 6 months. This then creates another perception problem in later funding rounds at Series-A or B when such a massive cap table needs to be cleaned up by late stage investors, if the startup is able to get to that stage.
Series-B and beyond is where many institutional investors, corporates, and other forms of funding is currently readily available in this sector, and most financial reports for institutional investors suggest them to focus on investing in ETFs in these growing sectors of the market but by then it is too late in getting exponential returns, and the 6x growth of this sector predicted by BCG in some areas of the sector may never happen if startups continue to die in the early stages without funding and support. This may likely lead to a gap of requirement of automation due to global economic and aging population issues, without technology available to fill it. For that reason till 2030 the focus needs to be on the early stage investments in these sectors.
Lack of Support
Many VC firms invest capital in robotics startups but fail to provide additional resources during the crucial early stages. Startups require assistance in achieving Product-Market Fit (PMF) quickly, developing the right business models for monetization, gaining access to resources necessary for Minimum Viable Product (MVP) development in the Pre-Seed stage, and establishing connections with manufacturers for future scalability. These are precisely the problems I have successfully solved as an operator since 2013.
Boston Dynamics, for instance, thrived after its ownership by Hyundai Motor Group(’20) and its contributing expertise in manufacturing, production, and commercialization despite being previously owned by Google X (’13) and SoftBank Group (’17).
Early-stage robotics startups often require operational, manufacturing, and logistics assistance the most. VCs may not have deep domain expertise or networks in the hardware industry, which can make it more challenging for them to provide valuable guidance and support to hardware startups in their portfolio especially if they have not actively engaged with hardware startups before. For example, a VC specializing in health tech may still struggle to provide guidance to a robotics startup offering a solution for hospitals during the COVID-19 pandemic. This necessary exposure to the domain can only come through operational experience or prolonged focused investing.
Investment Cycle Mismatch
While various funds exist that invest in robotics, it is often not their primary focus. Consequently, investment teams may not provide the same level of attention to robotics startups as they do to software-focused ventures when deciding which currently-revenue-generating startups deserve priority for follow-on funding. Notably, B2B SaaS startups often receive an average investment of $15.6 million at the Series A stage, whereas robotics companies, which require more capital and strategic direction, typically receive half that amount. Often those on consumer focused products have to wait to show a successful market validation through crowdfunding which, in and of itself, is a faulty parameter for PMF as early-adopters and enthusiasts do not mean lifelong customers, and should more appropriately be viewed as beta testers.
For these VC firms the returns from robotics and hardware startups also take longer to materialize than a typical fund’s exit period, but it is feasible to reduce this time frame with the right strategy and support.
Perception Challenges
Many VCs perceive hardware investments as challenging due to the enduring belief of “Hardware is Hard” germinating from long development times, high costs to market entry, supply chain complexities, regulatory hurdles, and scalability concerns. While these challenges exist, they are not fundamentally more daunting than similar obstacles faced in web3, fintech, SaaS, pharmaceutical/healthtech, or CPG industries. If innovative hardware truly posed such insurmountable difficulties, cell phones and smartphones would not have existed today. When a lot of investors start to lose money in hardware investments at the same time, because they all invested in the hype, it becomes news-worthy, which led to the perception of investing in hardware not being a good bet in 2017, this belief gets solidified for those who have never invested it. Investors instead needed a better metric to judge these founders.
The perception that robotics prototype development is slow and costly also persists, despite the reality being quite different in 2023. Technological advancements have accelerated the prototyping and manufacturing process, making it very efficient and cost-effective if only one knows how. Manufacturers work with startups helping them scale from MOQ of 10 to 10,000+.
Competition with Big Boys
Startups often struggle to compete with larger, more established companies in the industry. Industrial robotics, for instance, has been dominated by multinational corporations for several decades. These companies, operating in sectors like automotive and retail, require extensive resources and deploy massive robotic systems. Competing in such sectors can be challenging for smaller startups with limited funding and resources. The good news is this sector is not the one with the highest growth potential in the next 5 years.
Despite this, the robotics sector continues to thrive, driven by the unwavering passion and dedication of bootstrapping founders and engineers working tirelessly in the field, surviving on government grants and small teams. CES, for example, showcases a multitude of robotics startups every year, demonstrating the sector’s resilience and potential for growth.
VC – Founder Disconnect
Founders from product backgrounds get excited about a product they are building and investors in turn bet on the founder’s ability to execute. And while many can execute in delivering the product, they cannot execute on the business in the early stages and are unable to convey to investors why things are not working, believing that investors judge them more harshly if they do, leading to a bigger communication chasm between them.
Many roboticists are purists. If they don’t align with what you are building and why you’re building it, they won’t work with you, and for them the impact and technology is more important than the fact that your startup has multi-millions in funding. This means the early-stage founder in particular has to constantly balance the impactful vision to attract the best talent, with financial returns to bring in and keep the investors.
Founding teams in the typical product background are very optimistic about what they have built and are able to usually showcase why a product CAN exist but not why that product SHOULD exist. Many funded teams rely on “If you build it, they will come” mentality. The lack of business acumen among many of the founders leads investors to lose money on their bet if they don’t properly mentor the founders. Which is why even though a lot of great social robot companies started off with world-changing technology at their disposal, hardly any survived.
Founders in the early stages need support that most investors, who are not domain specific, cannot provide:
- Domain expertise in terms of understanding what founders want to achieve
- Guidance on their strategy and business expertise of what works and possible hurdles to avoid in operations, pricing, logistics
- Resources: Hardware for prototyping, manufacturing connections, Network of experts
I constantly hear from hardware founders in the field who have raised multi-million dollars in funding about how tough it is for them to find investors who can offer them “Smart Money” and not just an influx of capital. As a result, many of them bootstrap for far too long, survive slowly on government grants which limit them to a constant research cycle without deployment, give up and move to another field where funding is more likely, or raise from wherever they can but end up as a low priority in that VC’s portfolio.
Future of Investments in Hardware
Robotics investing is gaining traction as some investors recognize its potential, accelerated by the COVID-19 pandemic’s impact on healthcare, logistics, retail, and manufacturing. Investors are actively seeking startups with clear paths to commercialization and strong value propositions while emphasizing the importance of diversity in product development and teams which means their investments are usually in later stages and involves a lot of “Spray-and-Pray” in the early stages.
Hardware and AI will continue to act as catalysts for each other, leading to groundbreaking innovations. The true potential of artificial general intelligence (AGI) or its closest approximation can only be realized when it is paired with robotics and allowed to explore and learn from its environment.
Investments in these hardware sectors, will prove highly rewarding for investors with a proper strategy to tackle these challenges, while fostering rapid innovation. As the domain requires operational experience or prolonged focused investing but firms with a history of investment in the field are limited, the early-stage startups in this sector require assistance from VCs with operational backgrounds, to establish a solid foundation for future growth.