A Shaky VC Market
While high interest rates soar and inflation continues to increase, there has certainly been a market pullback. The Fed began raising rates five months before the ECB, as the US appears to take the hardest hit. Funding to US startups dropped 25% quarter-to-quarter, in comparison 13% for European startups, according to CB Insights.
Venture capital firms’ dry capital reached $539 billion in July, finds data firm Preqin Ltd. According to PitchBook, firms made 3,374 deals in the second quarter, down 24% from the previous quarter. This signals that, fueled by macroeconomic uncertainties, VC firms are becoming more selective about where to put their money. Investors are looking for a sector that will still thrive under tough economic conditions.
A shift towards Robotics
Could Robotics be the answer? Investors say the space has been elevated by the demand for automation in a post-Covid climate. Recently, logistics robotics company Zeal Robotics raised an undisclosed amount of funding from Marc Coucke’s Comate Ventures to develop robots. This has helped alleviate the shortage of logistics workers in Belgium after the Covid Crisis posed a threat to supply chains. VC firms poured over $17 billion into the sector last year, nearly triple the investment in 2020.
Autonomous vehicle maker Cruise closed a $1.35 billion corporate round in March from General Motors, and France-based mobile robot developer Exotec raised a $306 million Series D.
Last month, Iraeli startup ForSight Robotics Ltd. raised $55 million in new venture capital to develop robotic systems designed to improve cataract surgeries.
SaaS Still Strong… But.
The SaaS sector has historically captured the majority of the venture capital tech investment space. American SaaS company Concur was acquired for $8.3B by SAP in 2014. In August 2022, SaaS company HiBob raised a $150m Series D round.
However, investors say the venture capital model is losing relevance in SaaS, as new companies are creating niche models, focusing on one or two market verticals over being a platform technology. This means that SaaS companies today are likely to sell for a modest price, between $50M to $100M, which does not deliver a high level of return to the venture capitalist.
Robotics is said to offer a more attractive opportunity to investors. According to a report by ABI Research, a technology intelligence firm, robotics venture capital investments reached $5.7 billion in 2021, a 38 percent year-on-year growth.
The Global Robotics Market was valued at USD 27.73 billion in 2020 and is expected to reach USD 74.1 billion by 2026, registering a CAGR of 17.45%. The Global SaaS Market size was valued at USD 165.9 billion in 2021 and is anticipated to expand at a compound annual growth rate of 11.0% between 2022 and 2028.
While The Global Robotics Market is currently a fraction of the size of The SaaS Market, the CAGR for robotics is 63.04% higher than it is for SaaS, opening up a new wave of opportunity to investors. It’s possible tech investing could see a shift from more generalist technology businesses like simple SaaS platforms to the deep tech sectors like robotics.
A Safe Option?
While market prospects look bleak, the robotics sector appears to have moved into mainstream investment portfolios, suggesting that it is becoming a safe option to investors. Amazon announced its new $1 billion Amazon Industrial Innovation Fund in April. Of its initial investment, three have already gone to startups working on warehouse robotics. “The technology is better. … you have components now that didn’t even exist two years ago,” said Noah Ready-Campbell, founder of Built Robotics.
Investors acknowledge the risk associated with deep tech such as robotics investment. “We have no idea about market risk”, says Barrett, general partner at Playground Global. But it’s possible that the robotics industry could thrive under tough market conditions, as it promises to aid labour market shortages.
A Solution to the Shortage
In August, UK agri-tech startup Muddy Machines secured €1.8 million in seed funding to help develop a robotic platform that is capable of deploying harvest tools in specialty field crops, as farms complain of “desperate labour shortages”.
“There is a myth in farming that there is an unlimited supply of labour outside the farm ready to go at any moment, and that couldn’t be further from the truth,” said Igino Cafiero, founder of Bear Flag Robotics.
In January 2021, Bear Flag Robotics landed a $7.9M seed extension to make self-driving tractors. This comes two years after a $4.6 million seed round, led by True Ventures.
While the VC market appears shaky overall, as labour shortages increase, the robotics industry looks promising as an area of investment for VCs to explore even further. Robotic solutions offer either a replacement or enhancement for manual workers, which could become increasingly necessary to keep businesses afloat over the next decade.