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Investing in Robots: The Emergence of Global Hardware Unicorns

Vincross HEXA

Robots captivate our attention like no other technology. Whether you dream of a world where robots do hard labor, freeing up humans to think and create — or fear a dystopian future where machines become smarter than humans — almost everyone is fascinated by robots. Until now, robots have mostly been the stuff of sci-fi fantasies, but technology has reached a tipping point where autonomous robots will soon live and work among us in large numbers.

As a long-term investor in frontier tech companies, I see a perfect storm brewing for robotics to finally enter the mainstream: low-cost sensors; open source robotics software; 3D printing; breakthroughs in artificial intelligence; and a growing societal acceptance of “intelligent” machines. Combined with record capital investment into the robotics sector and surging demand for automation technologies worldwide, globally-minded entrepreneurs have an unprecedented opportunity right now to build breakout robotics companies.

Investing in robots may be trendy today, but I’ve been building and funding autonomous devices for three decades. As an engineer with degrees in wireless communications and control systems, I designed my first drone 20 years ago — and as a VC for the last decade I’ve gravitated toward funding frontier-tech companies that combine the best of Chinese manufacturing with the might of American marketing and design. One of my most exciting moments with smart machines came in 2013 when I met Hu Huazhi, an aeronautics scientist and dreamer, and the founder of eHang, creator of the first passenger drone capable of autonomously carrying a person in the air for 20 minutes. Nearly a year before Uber began its formal effort for autonomous vehicles with a team from Carnegie Mellon’s National Robotics Engineering Center, I invested in eHang and this summer witnessed its first autonomous manned flight tests.

Access to Capital

In 2015, venture capitalists poured $587 million into global robotics companies, a record high, and investment is on track to eclipse that amount in 2016, according to CB Insights. Alongside investment into robotics companies themselves, VCs are racing to fund AI technologies that provide autonomous robots with the capacity to “think”. In Q2 2016 alone, venture investors poured more than $1 billion into AI companies.While American investors see big potential in robotics startups, capital is also flowing freely in China, where VCs are accustomed to investing in hardware startups. Chinese investors have seen hardware unicorns like Huawei, Xiaomi, and AAC achieve success on a global scale, so are eager to fund the next generation of robot hardware companies — both in China and abroad.

Demand from China: A Massive Opportunity

At GGV Capital, we’ve identified two sub-sectors of the robotics industry that hold particular promise: industrial and service robots. For now, China is the largest potential market for startups tackling these two markets. Startups building next-generation robots — especially collaborative bots that work alongside humans on the factory floor — have a nearfield opportunity to break into China’s massive manufacturing and service industries.

The global industrial robotics industry is well developed, currently accounting for over 80% of the robots in deployment. Industrial robots mostly work on factory assembly lines and are well established in the US, Japan, and Europe.The Chinese government actively supports automation, believing robots will make Chinese companies more competitive. China, the largest manufacturing economy in the world, has only 36 robots industrial robots for every 10,000 manufacturing workers, compared with 292 in Germany, 314 in Japan, and 478 in South Korea. Chinese manufacturing companies bought 28% of the industrial robots sold globally in 2015, and will purchase hundreds of thousands more in years to come to combat rising labor costs. Established robotics companies such as Kuka, Fanuc, Yaskawa, and ABB will compete for those sales, but several promising startups, including Grabit, Rethink, and Life Robotics, are also making strides.

Service robots, which perform set tasks for people in restaurants, hotels, offices, hospitals, and homes, are more of an emerging market in China, but one that holds huge potential for startups. Again, with rising labor costs, restaurants and hotels are eager to adopt service robots to boost long-term profits. Service robots can deliver items within buildings, bring meals and packages from delivery trucks to your door, serve food and drinks, bring medicine to hospital patients, retrieve goods in warehouses, serve as receptionists, entertain kids, and more. Though in the early stages, startups such as Fetch, Savioke, KeenOn and others have already commercially deployed service robots. In the next 5–10 years, breakout companies should emerge in the service robot space, especially in US and China, with a few “robot unicorns” possible.

Investing in Robots: Does the Math Work?

Like any frontier technology, robotics has huge potential, but also faces roadblocks to widescale adoption. In the industrial space, it’s fairly easy to predict potential returns because robots have been in use a long time in manufacturing. To gauge whether a robot is a good investment, a factory owner can simply measure the current cost of labor vs. deploying the robot, or measure productivity before or after deploying the robot. Investors can measure similar metrics to determine an industrial robot company’s profitability potential.

In the emerging service robots space, estimating future returns isn’t yet as clear cut. For consumer service robots, such as home automation and toys, the product must have mass-market appeal, a low price point, and a clear benefit. For the moment, most consumer robots don’t meet these three criteria, either being too expensive, too technical for the general public, or with no ‘must-have’ benefit. For service robots with enterprise applications, such as those used in offices, warehouses, hospitals, and retail stores, ROI may be slightly easier to calculate. If a service robot can cut labor costs, help workers gain in productivity, or add a new service that attracts customers, then its monetary value is easier to measure.

Global Collaboration

Where will the next robot unicorn startups emerge? Most likely, the most successful robotics startups will be global in nature, leveraging strengths from China, the U.S., Israel, Germany, and Japan. Since robots are really just a technology integration of hardware, sensors, and software, Chinese startups with additional expertise in manufacturing and supply chain logistics are well placed to succeed globally. But Chinese startups will only capture global market share if they leverage American or Israeli engineering, marketing, and sales talent, and work with established robotics players in the world’s leading robotics-driven economies, Japan and Germany. The same holds true for U.S. robotics startups; they need a global mindset from the get-go. The first robotics unicorn will likely have operations or partnerships that span the globe, no matter where it’s officially based. GGV recently invested in robotics company Vincross, which is based in Beijing but is building a team in the U.S.

The robotics industry presents huge opportunities for startups to capture market share at the beginning of a fundamental technological shift. Next-gen industrial and emerging service robots will need inexpensive sensors, radar, 3D printing, language and image processing technology, cameras, and AI software to be cost effective enough to spur widespread use. If entrepreneurs and VCs focus on building and funding these core building blocks today, we should see millions of new robots in use across a multitude of industries within the next decade.

Jenny Lee is a managing partner with GGV Capital, a $3.8 billion venture capital firm that invests in technology leaders in the U.S. and China. Some of her recent frontier-tech investments include eHang, Immotor, NIU, Vincross, and Phononic.

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