Five Fundraising Absolutes for Robotics Startups
Make the effort to understand the proper fit between your company’s scale and the scale of the fund.
Too often, founders court venture capitalists without understanding that the company they are founding might not be the right fit for VCs. Venture capital firms generally, and ones that invest in robotics, look to invest in startups that have clearly identified potential to scale exponentially. They are not geared toward backing entrepreneurs who are looking for an exit under $100 million that will only realize a handful of multiples for the investor. VCs are more likely looking to fund on a much larger scale – think $1B+ exit valuation – and to back a company with the potential to deliver at least a 10x return. Usually robotics companies are capital intense and require a robust revenue model compared to pure software startups, and this is not for every VC. In fact, venture capital is likened to “rocket fuel” that is dangerous if put into a car but perfect for a rocket ready to shoot for escape velocity. Smaller-scale ventures often do not interest VCs but might be perfect for, say, angel investors. Bottom line: do your homework, manage expectations, and seek funding from investors working at a scale commensurate with your idea, and are comfortable with the unique needs of robotics companies.
There are multiple sources of capital that fit different companies and also fit the same company at different stages of its growth.
Now is a great time for starting a company, in part because there have never been more sources of financing available. Angel investors and venture capitalists are just a portion of what is available. There is growing opportunity, especially for robotics and AI startups, in non-dilutive capital, including from government sources such as DOE and DOD grants. There are loaded/non-dilutive funding streams such as convertible debt available from financial institutions and angels. SPACs, especially for hardware and robotics companies, have become popular in recent years. Some of these might be a better fit for your company at the current (or future) stage of your organizational growth cycle. But caveat emptor. Some sophistication is warranted. Ask yourself what constraints or potential downsides come with the specific funding model you are considering/pursuing. Government grants, for instance, might drive the pace of development or may direct you toward certain customer-facing directions in ways that could be ill-suited to your company. Always ask yourself what baggage comes with each funding opportunity and run a cost-benefit analysis before accepting. Due to the nature of the hardware and software complexity of robotics companies, pivoting to other markets or applications might not be as easy and feasible as in pure software companies. Also be careful about what agreements you sign in the company’s early days. Are you giving away too much leverage or control or revenue share for that early-stage money? What looks like a small price to give away to a funder when your company is young and small might be a source of regret when your company becomes the behemoth you hope to create.
Be a sophisticated storyteller.
When hiring your early team, consider including at least one person who has strong fundraising acumen. For long time, the robotics community has been putting disproportional emphasis on the technology development, which is important and needed, but not enough to commercialize and scale companies. Make sure that your founding team is well-rounded and complementary both on the technical and the business sides. A savvy founder ensures that the first hires round out essential skills that s/he might not bring to the table. Nobody can be expert at all things required to build a great company. Most business-oriented founders readily recognize the need for tech hires to complement their skills – or vice-versa – but it is less common for founders to recognize the urgency of hiring skilled fundraisers right out of the gate. Fundraising is both art and science. Sophisticated fundraisers will help you build a compelling narrative. Storytelling is a key ingredient in getting funders to believe in your vision and company’s promise. It helps funders to see more clearly what will excite customers about your unique value proposition, how large the potential market is, and that there is a larger mission you are fulfilling. A compelling narrative should include not only what customer or social pain point is being met but also why the time is ripe to address this challenge now. VCs are tired of hearing wild-eyed projections of TAM that demonstrate little bearing with what a particular company is realistically poised to capture. A clear and charismatic story about how your robotics company is going to meet large-scale needs and change the world is much more convincing, when done well.
Your first 10 hires are crucial.
In addition to your fundraiser, treat all of your early hires with the utmost care. Investors will scrutinize your early team to see if you are able to entice top-quality talent to your vision and are willing to surround yourself with the best. There is a popular adage in the VC community: “A players hire A+ players, but B players hire C players.” Being able to attract the best talent is an indicator of whether you will be up to the task of attracting great customers and engaged investors. If your robotics network doesn’t give you exposure to the talent you need, make sure to expand your network out of your comfort zone. There are lots of online resources available today that can help you search and find the best talent out there. Don’t limit yourself by the lack of cash. Many talented people are willing to work for an equity or a mix of cash and equity if they got excited enough about the team and the company. Storytelling comes handy too when attracting the best talent out there.
Before seeking funders, do an objective assessment of where you are and how that will appear to a potential funder.
It is helpful to put yourself in the position of your potential funders, looking frankly and realistically at your company from their vantage point. Where is your company today and what is its likely path in the short term? What is the realistic point at which you are likely to create ROI? Consider a risk assessment of your company, much as a potential investor might. What technical risks remain before your product can be brought successfully to market? What is the team risk, market risk, competitive risk or even the regulatory risk? How high are those hurdles, what is your plan (and your confidence level) to surmount them? The ability to answer these questions honestly will help you align effectively with the right scale and type of funder, and it prepares you to answer the tough questions that funder is sure to ask.
There has never been a better time to pursue funding for robotics startups, but you are more likely to succeed if you build a fundraising strategy that is marked by the same sophistication and informed understanding you already bring to many other aspects of your new business.
Provided by: Fady Saad, MassRobotics cofounder, Lidiya Dervisheva, partner at Next47, and Bilal Zuberi, partner at Lux Capital
Authors Fady, Lidiya and Bilal bring deep understanding to startup fundraising on multiple levels. MassRobotics is the largest robotics startup escalator in the U.S., leading a cluster of more than 350+ robotics & AI companies, hosting 60+ resident startups and partnering with close to 35 strategic corporates. Next47 has a $1.2 billion fund committed by Siemens to invest in B2B startups ranging from enterprise space to industrial tech to deep tech across multiple geographies. Lux Capital is a bicoastal firm investing about $2.5 billion in more than 150 portfolio companies, concentrated in deep tech startups addressing large-scale societal challenges. The above information is culled from a recent discussion focused on fundraising for robotics startups hosted by MassRobotics.