This startup season is filled with goals of profitability, promises of higher margins and whispers about pivoting toward sustainability. So when it comes to robotics, a capital-intensive sector that has a longer sales time horizon and loads of infrastructure hurdles, tensions feel inevitable.

Or at least, you’d think. Crunchbase data shows that, despite a creaky market, venture funding for robotics startups remains strong. It’s a dissonance worth exploring, so that’s exactly what we did at TC Sessions: Robotics 2022 with investors Kelly Chen, partner at DCVC, Bruce Leak, founder of Playground Global and Helen H. Liang, founder of FoundersX Ventures. The trio of investors spoke about how the ambitious sector is surpassing some of the downturn’s harshest symptoms.

The answer includes a shift in investment strategy and Amazon.

No more moody robotic arms, please

Investors agreed that the pandemic raised the awareness, and opportunity, around robotics as a venture-backable category. The attention meant that the bar of investment is getting higher, and hopefully more ambitious at the same clip.

“We used to see companies will just pitch one robotic arm for a certain probe, like, automating a biology lab sample or food processing,” Liang, who started FoundersX Ventures in 2016, said. “Now we will see more vertical plays…where you focus on value creation, and focus on scale on day one.” Instead of building a robot and finding ways to apply it to problems, startup founders may move in the reverse direction: find a problem and see if it can be answered using robotics and artificial intelligence.

Chen added that some companies are focused on a broad-enough problem that they can hover between a vertical and horizontal play. Micro fulfillment, for example, is broad enough to be cross-sector but the product would serve the same function regardless of end destination.

While Chen hasn’t written off the idea of horizontal plays, she is thinking more about margins, given the downturn.

“If you think about early-stage robotics, people aren’t thinking substantially about that or thinking about customer growth growing the top line,” she said. “But if you’re getting to the mid-stage and growth stage of robotics companies now, you need to start thinking about having healthy margins, and how do you keep growing those margins in comparison to revenue?”

Leak thinks that it’s important for founders to remember the importance of focusing on big markets. “Technology for technology’s sake just doesn’t get you there, it takes too much time and too much money to get to the end… it is hard, commercializing deep tech companies is one of the hardest things to do.”

‘The layoffs are looming’

In response to a question about layoffs, Leak says he’s happy his portfolio — which includes Leaf Logistics, NextSilicon, Sentropy and Skydio — raised cash last year when market conditions were better. It’s not entirely a dodge; robotics has felt quieter compared to sectors like fintech, crypto and real estate when it comes to layoffs during this latest wave.

However, there are exceptions. Most recently, DoorDash wound down Chowbotics, a salad-making robot, and Fabric, a delivery and logistics company, recently told its 300-person staff that it’s laying off 40% of them. Plus, as we’ve seen through broader layoff coverage, even well-capitalized tech companies have chosen to cut staff in pursuit of profitability.

“On the less rosy side, I think the layoffs are yet to come,” Chen said. “In an economic downturn, the customers will be less willing to be experimental, so they’re thinking about cutting costs and then economics just becomes so much more important.” She said that we’ll likely see some shutting of talent, and the exodus will go to companies that are “fighting the real problems and getting those customer contracts signed.”

I’d argue that one such company, that Chen and Leak co-invested in together, seems especially well-poised to grow in the coming months: Agility Robotics. The logistics tech startup raised a $150 million round co-led by DCVC and Playground Global in April 2022. As part of that round, Amazon made one of its first investments out of its $1 billion Industrial Innovation Fund. It’s a stamp of approval all three investors seemed to appreciate.

Amazon’s $1 billion bet

“Agility has really created a breakthrough set of technology that makes a practical robot that can actually deliver, but no one believes it because it seems too futuristic,” Leak said. “Having a customer and a seal of approval by someone like Amazon really changed the way the industry thinks about robotics.”

It makes sense. A customer and investor like Amazon, which has the warehouse and logistics demand to integrate robotics at scale, can feel like the ideal partner for a startup hoping to commercialize. That said, corporate venture capital partners aren’t just getting equity out of their investments, they’re getting intelligence that they can then put back into the business. Those lines can sometimes be blurry in a world as competitive and IP-heavy as robotics.

Liang, who isn’t invested in Agility, said that she always suggests startups take on strategic partners early on because it gives a signal of market demand. “But you want to balance this, you don’t want to customize your solution just for one customer, right, you still have to look for the widest market you can penetrate.”

Despite the Amazon and corporate partner appreciation, Leak thinks that Agility Robotics isn’t teeing itself up for an eventual acquisition by the e-commerce behemoth. That’s a statement of its own, given the fact that there is a sparse number of robotics IPOs and a far, far larger cohort of merger and acquisition deals when it comes to sector liquidation activity.

“We have very big dreams for Agility,” Leak said. “They can start in warehouse and logistics and really grow to be a practical robot for almost any menial task replacement.”

He added: “We think that opportunity is much bigger than even the insatiable demand that Amazon has for it.”

Source: TechCrunch

By Peter

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