Jason Schoettler
Raising a Series B for any startup is challenging right now, with many VCs pulling back on investments — funding for Series B rounds across all sectors fell 55% in August compared to a year earlier, for example.
But raising a Series B for a hardware startup can be even tougher. It has simply always been more difficult to get venture investors to fund a robotics project compared to a software-only venture, given robotics’ high capital requirements and the greater risk.
However, the climb uphill can get much easier if a robotics startup can showcase a solid business model, measurable metrics and a plan for the next 18 months. As an investor in AI and automation companies for over 20 years, I’ve backed dozens of robotics companies, and I continue to be bullish on the space.
Here are several strategies founders can use to prepare their robotics companies for a successful Series B.
Show how your robot works
Robots are inherently visual (can anyone forget that video of Boston Dynamics robots dancing?) So when you pitch VCs on your automation company, it pays to demonstrate your robots in action.
If your robots are large installations in warehouses or on manufacturing lines, invite VCs to come to see them working. If they are small enough to transport, bring them with you to the pitch meeting. And always have high-quality video available to share on a computer or tablet during in-person pitches or online for virtual meetings. Seeing your product in action is critical to getting investors excited about it.
Show customer ROI
Just having a great idea won’t cut it at the Series B stage. Investors will want to see real customer ROI, with metrics showing growth in your customer base over time, sustained increases in contract values and measurable ROI for each main client. You need to show that customers are deriving real value from your robots — saving time, money or both.
If you can’t show real ROI for several customers, you’re not ready for a Series B. It’s also important to quantify the total ROI of the robot over its life.
Hardware is nothing without software
You might be a hardware company, but robots run on software, especially AI and ML technologies. When approaching Series B investors, it’s critical to tell a convincing software story. Do you have a top software development team? What is your software’s secret sauce that can’t be replicated easily by a competitor? Do you have any patents on your software or software-hardware combinations?
Investors will want to see a path to recurring software revenue that can scale over time. As investors, we are particularly interested in hardware-meets-software models: robotics-as-a-service and machine sales that include recurring software revenue from maintenance, services or upgrades.
Get your metrics in order
Make sure you have solid metrics to present before setting up meetings. Here are a few we like to see in Series B robotics companies:
- Customer ROI:
- More than two-year payback is not compelling.
- One- to two-year payback is good.
- Less than one-year payback is great.
- Gross margins of over 50%.
- Customer relationships and pipeline to drive $10 million in new revenue over the next 12 months.
- Trailing 12-month revenue of about $3 million.
Looking ahead
As investors who exclusively back AI and automation companies, we see a lot of opportunity in the coming 12 to 18 months, but we also expect challenges to continue. The supply chain disruptions over the past two years haven’t been solved yet and could possibly get worse amid the double-whammy of increasing inflation and labor shortages.
This presents an opportunity for robotics companies, as the supply chain needs to be automated to survive. However, inflation is tying up capital longer as companies and individuals hoard cash, making companies more reluctant to purchase hardware in the short term. For robotics companies, this could result in lower sales overall and less momentum.
We’re still investing in automation companies at a steady clip. The best companies we see at the Series B stage have great product-market fit, customer ROI of less than one year, strong future interest shown through sales contracts and proof that the solution alleviates a fundamental macro problem (labor crunch, skills shortage, supply-chain bottleneck, etc.). We also look for companies that have flexible partnerships with multiple contract manufacturers, showing the ability to scale up production as demand increases.
The best advice I can give to founders looking to raise capital at any stage is to start early, get prepared (and then prepare some more) and have clear, open, data-driven discussions with VCs. Also, simplify as much as you can. If you can’t easily tell the story of why your robot is mission-critical, how it saves your customers time and money today, and how sales will continue to grow tomorrow, then your business model is too complicated.
Streamline your product line and extend your runway; don’t try to do it all. Also, remember that it’s always better to sell out of your product than be stuck with inventory you can’t sell, so be smart about matching inventory accumulation to customer demand.
Raising a Series B is not as easy as it was a year ago for robotics companies, but great deals are still getting done. Founders who prepare well and focus on showing, not telling, will come out ahead in today’s challenging fundraising market.
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