As robotic solutions creep into our everyday lives, Kim Richters looks at private equity’s relationship with the increasingly important sub-sector.
Ever so slowly, robotic solutions are easing their way into people's daily lives, with companies testing more and more automated and robotic procedures to ease and quicken processes previously handled by humans. Most recently, big corporations such as Amazon, Dominos and German mail service Deutsche Post have been trying out new ways to deliver packages with unmanned robotic air devices, receiving a great deal of publicity with much discussed videos of trials.
"Whether we realise it or not, robots play a key role in improving our daily lives," says Tony Robinson, a partner at venture firm Scottish Equity Partners. "From cars to food, it is likely that some form of robotic process was used to provide what we use and consume every day. Modern-day society currently owes much to advanced machinery capable of undertaking tasks that would either be impossible or too time-consuming for a human to complete. From mass-production in industry, to cutting-edge precision within the medical field, robots are of increasing importance." SEP's £1.25m investment in remote aerial industrial inspection company Cyberhawk was the GP's first robotic investment ever, and the firm is currently looking into a number of other opportunities in the sector.
The US has seen bursts of venture capital investment in the space, with companies such as Rethink Robot raising funding rounds of $30m. However, the European robotic sector seems to be less active. Across the Continent there have been 17 investments since 2011, with the biggest being a $13m series-C funding round for French technology company Aldebaran Robotics led by Intel Capital, according to unquote" data.
Raising $20m or more of capital in series-A, -B and -C rounds provides a start-up with much needed equity in order to research and develop its automated robotic product. But the significantly smaller European venture rounds are expected to cause a time drag on the development stage. This long growth period means a longer wait until the portfolio company can be valued and exited at a high market value.
High-Tech Gründerfonds (HTGF) investment manager Michael Strzyz thinks a hardware firm will likely need around five years before reaching EV in the region of €30m. But even after it reaches that enterprise value, the business will likely still need another four or five years to grow further in order to go public and generate a profitable return.
HTGF recently backed lightweight robot developer Biotonic Robotics (then BioRob) in a seed round. Strzyz says: "One of the founders of Robotics has been working on the firm's software for the last six years - that's a very long time and it illustrates that hardware companies need time. Not only does the hardware development take time, but there's also the financing and market situation; these reasons combined make the robotic sector a very complex place to invest in.
"It is much more difficult for start-ups to raise €2-3m for a robotic firm than it would be for them in the Silicon Valley. Understandably, many European VCs look at possible investments with the outlook of reaping a healthy return as fast as possible. Moreover, the start-up has to prove its consumer base and a successful structure. It definitely is a challenge to fill German VCs with enthusiasm about robotic investments," adds Strzyz.
Strzyz also notes that a strong engineering industry in Germany is making it much easier for potential company founders to find work at big corporations, which is less risky than raising your own start-up. He says: "We know the early-stage market in Germany quite well, meaning that we deal with a lot of potential start-ups in a phase when products are purely the ideas of founders. Unfortunately, we witness a strikingly low number of robotic start-ups. One of the reasons may be that the hardware as well as the high-tech software industry is very strong at the moment and there are plenty of job offers out there. The potential founders, the graduates, are hired by corporations right away when leaving university, sometimes before they even finish their masters."
More often that not, robotic start-ups need an extended development period as engineering errors are likely to delay procedures. Another factor for the rather slow pace of the European robotic sector may be the attitude of customers - Americans are usually more open-minded towards tech gadgets, while Europeans tend to be more sceptical. "If there's a new vacuum robot, people will try it. That's why the hardware gadgets are much more popular over there. People in Germany do consume hardware gadgets, but they are much more sensible about prices and sceptical towards new products," Strzyz says.
However, private equity investments in the robotic sector are likely to increase in the near future as cheaper production and rapid technological development changes the way robotic products are made. If more cost-effective to produce, robotic solutions will carry a more affordable price tag, which, in turn, may lead to a greater interest from consumers across Europe.
Robinson, who sees Europe as one of the market leaders in the remotely operated aerial vehicle sub-sector, argues: "As technology develops, the functionality of robots will increase to provide a greater range of functions at lower cost, while methods of power supply are continually being developed to better meet the needs of mobile robots. Robotics and automation can enhance productivity for SMEs and enhance Europe's overall global competitiveness, creating new jobs and re-invigorating the industrial and services sectors."
Pointing out SMEs' important role in bringing an economy out of recession by being adaptable and agile, Robinson adds: "Robots are similarly adaptable and agile, and there is a growing trend towards SMEs investing in robotics for reasons of productivity, quality, and health and safety."
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Date: 05 Nov 2015
Location: Milan, Italy
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