Four Steps to the Epiphany: the Moby Dick of start-up books

Image: Front Cover; Source: Amazon

If your experience of Moby Dick was that you were constantly aware that you were reading one of the best books of all time that was opening your mind to new ideas if only you could keep your eyes open, you understand.  Four Steps to the Epiphany is the great white whale of start-up books for a reason.  Although it is not nearly as easy to read as his disciple Eric Ries’s more famous book, The Lean Start-up, it is much more systematic.  This books has some profound insights about understanding why some start-ups can do it one way and others need to do it completely opposite.

Instead of abstracting and generalizing the insights, Blank focuses on the issues of managing under extreme uncertainty in their native context.  He tackles every aspect of the non-engineering side of the business.  Most of the book is about how to systematically eliminate the market risk for your product, this will be somewhat familiar to you if you’ve read the Lean Start-up.  However, seeing the original idea and seeing it laid out in full detail, in the context it originally sprang from adds a lot of richness and practicality to the idea.  Blank devotes a good deal of time to understanding how to make technology push and market pull work together.  He covers when to go for broke spending money to enter a market and when to hold back and let the customers come to you.  Most importantly, this comes with some practical steps to discover when to do each.  He even covers how to start converting to mature company once you’ve almost made it.

Much like Melville, Steve Blank will say something really profound and insightful, then launch into a description of whaling–er, uh–start-up processes that are needed to implement that idea.  This can make the book a tough slog, because reading a process description around bed time can definitely have soporific effect.  However, this tough slog is absolutely worth it if your a practitioner in the world of technology start-ups.  You can’t hand it to your cousin that works at a big company and expect him to read it.  This is meant for the start-up community.  If you are a start-up practitioner, get this book and make yourself read it.   You will not be disappointed.  I expect my copy to become much more dog-eared than it already is before it gets confiscated for some future company museum.

So how does this relate to robotics…

Reading this book will further persuade you that many if not most management teams of robotics companies don’t have a clue.  You’ll even be able to look at robotics success stories and realize–wow–compared to software our industry’s state of management practice is pretty dismal.  Many successful robotics companies just fell bass-ackwards into their success.  Many were product driven companies to a fault that were able to expensively keep trying until they finally hit a success.  This is not the same thing as systematically eliminating and consciously balancing market versus technical risk to produce the greatest chance of creating successful business that uses robotic technology to make money and make the world a better place.

We’ve got a long way to go as an industry.  Luckily, now that we know that there’s nothing inherently ‘capital intensive’ about the robotics industry we can start addressing why we have so often screwed it up before.

Hizook 2011 Notes

Be on the look out for a forthcoming analysis of the Hizook 2011 VC in Robotic List on Hizook about the funds that invest in robotics.   I’m publishing my research notes here so they don’t foul up the article.  Most of this was sourced from company websites, CrunchBase, local media, or whatever I could find using Google with my limited attention span, I think I even remembered to cite a few as I was making this.

The only thing I’d really like to call your attention to, dear reader, is the complete lack of transparency in the private markets.  You’ll see that there are places I could find a round, or an amount, or fund but nothing else.  A lot of the poor citation is me trying to find a better source.  Private transactions have no organized data so if this can be the faintest candle for finding funding for robotics, then I’ve done my job.

As always, I’d love feedback.  I’m hungry for data!

Where are the Ops Companies?

Really where are they?  Given how many companies are  building some form of robot it seems like there should be some proportionally greater number of companies out there forming to implement, service, and operate these robots.  Where are they?

Frank Tobe isn’t finding a lot of them forming in his start-up list.  Even the RIA seems to have fewer integrators than suppliers.  AUVSI has many more Lockheeds and Insitus than VT Services.  One could make a case that this is characteristic of the peculiar industries that we’re looking at.  The robotic counter example is perhaps the ROV industry which routinely provides the ROV as a packaged service to the off-shore oil and gas industry.  But most consumer robotics are still selling to early adopters.  Our consumer customers are all people who want tech for tech’s sake, not to mainstream customers that are just looking to solve a problem.

Think about other complex goods in our economy.  Computers have a vast cottage industry associated with servicing and maintaining them which is probably as big or bigger than the software industry proper.  All vehicle industries whether air, ground, or sea have vastly more businesses in the business of selling the services than engaged in construction of the vehicles–even if constructors do manage to capture a large share of the total revenues of the industry.

I think our industry has a problem.  I’ve talked to people at the oil and gas majors and heard straight out that robotics companies are producing robots which have a business case to be used several applications, but they will never be used until a credible organization to is there to provide the robot as a service.   It is a bit of chicken and egg, but I think this applies as you go down the chain, not just in large capital projects.

When doing sampling or reconnaissance, customers want actionable data not a fleet of robots or new employees.  I know from experience that infantry brigade commanders love having drone imagery of the battlefield, but don’t want to worry about having to support the drone unit, they just want to see the battle.  This is equally true in forestry, agriculture, infrastructure, and minerals.

Do I really want to own a cleaning robot? No, I would much rather have a business that comes to my house every week and keeps the place clean whether that business uses humans, robots, or both.

Even in medicine, if I were a hospital operator I’d love to be able to push the risk of owning the robot back onto someone else.  If I can pay per procedure and not worry about utilization, maintenance, or obsolescence–I’m much more game to adopt something new.

To date, our industry has done a relatively poor job of making robotics accessible to people and organizations who aren’t willing to organize around robotics and develop organizational competence in robotics.  Providing robotics as a service could greatly expand the number of potential customers.  I think when we see these businesses start cropping up, we will know that our industry is no longer in its infancy.

Surprise! Robotics Companies Are NOT Capital Intensive

Please allow me to blow your mind and overturn the common sense notion that robotics companies are capital intensive.  Comparing profitable, public, U.S. based robotics companies to a diverse basket of prominent public companies shows that robotics companies do not require a lot equipment and property to make successful businesses.

In fact, robotics companies have the least property plant and equipment of any of the companies I selected for comparison–which deliberately included such tech giants as a chip maker, an operating system maker, and a search engine giant.  Looking at capital expenditure and depreciation, the robotics companies are again among the leanest of the companies on the list.

The only companies that had such low numbers for CAPEX and depreciation had their assets tied up in very long term investments like real estate and aircraft manufacturing facilities.  Also, most of the robotics companies are still growing and may have their capital expenditures boosted as a percentage of revenues by their anticipated growth.  Take a look at the trend line.

Now what people may mean when they say that robotics is ‘capital intensive’ is that the marginal cost of goods sold for a robotics company is greater than $0/per unit that consumer web applications have–but if that’s what they mean they should come out and say it and not be sloppy in their reasoning.

Angels, VCs, and other investors are you paying attention?  Big plays are going to be made on relatively small bets.

As a Percentage of Revenue
Ticker

Company

PPE Depreciation

CAPEX

Robotics

IRBT

iRobot

6.81%

2.42%

3.05%

ISRG

Intuitive Surgical

11.31%

1.68%

6.79%

AVAV

Aerovironment

7.24%

2.76%

4.61%

CGNX

Cognex

9.86%

1.72%

2.43%

Robotics Median

8.55%

2.07%

3.83%

Robotics Average

8.80%

2.14%

4.22%

Diversified

GOOG

Google

25.33%

3.68%

9.07%

MSFT

Microsoft

11.67%

3.95%

3.37%

T

AT&T

84.50%

14.50%

15.87%

INTC

Intel

43.75%

9.52%

19.93%

XOM

ExxonMobil

45.96%

3.34%

6.63%

BA

Boeing

13.55%

2.12%

2.36%

D

Dominion Resources

206.34%

8.96%

25.40%

AA

Alcoa

77.82%

5.94%

5.16%

DIS

Disney

38.99%

4.50%

7.32%

HD

Home Depot

34.54%

2.39%

1.65%

Diversified Median

41.37%

4.23%

6.98%

Diversified Average

58.25%

5.89%

9.68%

Some notes on the analysis:

-Data comes from the companies last 10-K filing.  Some companies include different things in revenue (where possible I tried to exclude revenue from a financing arm), in deprecation (some include amortization of intangible assets), and capital expenditure (Intuitive, for example, includes the acquisition of intangible assets).

-I wanted to look at a diverse basket of public companies and tried to pick companies that might be similar in some ways to robotics companies but whose earnings would not be unduly influenced by robotic related income.  For example, I excluded offshore oil field services companies because they were too close to being robotics companies, but still not pure enough to get a good view of the diversified company.  I did include Disney (which does anamatronics), Boeing (which has a UAV making subsidiary), and Google (which has a robotic car division) because I thought the revenues contributed to the these companies by robotics related activities had no material impact on the financial metrics.  However, their tangential involvement in robotics speaks to their similarity to robotics businesses.

-Future analysis should look at some other places where capital use can be buried.  For example, Cost of Goods Sold can hide capital that is employed on the companies behalf further up the supply chain.  It is possible that current assets like inventory may also need to be higher for robotics companies.  Also, we should compare total assets and liabilities to the revenue generated to similarly sized public companies to see if there is a substantial difference.

Before we can even have a bubble in robotics…

Our industry needs a better methodology for managing robotics development.

I just a had a great entrepreneurship conversation.  My entrepreneur friend opened my eyes to the possibilities for robotics in an industry, platform space, and application that I had pretty much written off.  The application was using robots to collect data–the simplest and earliest task for any class of robots.  He had taken a fresh look at an industry he knew intimately and seen that there was an opportunity to do something extraordinary and make some money.

This friend is not a robotics expert, but he’s been awakened to the potential in the robotics field.  His big concern and great hesitancy to  jumping into this business is establishing a workable business model.  He sees the potential in the opportunity with the vividness of an insider, but when it comes to the robotics he could use, he sees the immature, expensive junk of an outsider’s eye.  He’s vividly aware of the danger he might not structure the business or implement the technology in such a way as to be the guy who becomes profitable and grows first.  He saw that it would take a lot of money and time just to prove out the concept and that it might take much longer to figure out the right business model.  Meanwhile, his fledgling robotics company would be burning cash at the combined rate of a software, hardware, and an operations company with a direct sales force–not a very pretty proposition.

I didn’t really have anything to say to him on that front other than hackneyed cliches about iterating, pivoting, and the value of moving early.  It really occurs to me that my friend is already following what little we know about how to build a robotics company.  Be a great whatever-you-are first (medical device, logistics solution, toy, etc.) then have it be a robot.   Don’t market the thing as a robot; market it as a new technology solution to a real problem that is worth money to solve.  Be willing it iterate (fail on first attempts).  Go to market with the least capability that you can get paid any money at all for.   All great principles, but it seems like we’re still missing the kind of prescriptions that have developed for software.

The Lean Start-up movement, combined with movements like Agile Development have brought much more rigor to how software development in early stage companies is managed.  More traditional software and engineer models are still applicable to projects where the desired outcome is well known.  In most of my conversations with engineers, it seems like robotics engineering has not reached a similar stage of maturity.  It is difficult for robotics engineers to communicate to business leaders when they will know something that allows for opportunities in business decision making, let alone accurately forecast the true cost of a development job.

The most successful robotics companies do a great job managing development.  However, when you talk to their founders or engineering leads, they are often at a loss to explain what they did differently from failed efforts.  They might explain how they avoided some basic pitfalls–like outsourcing design work–but they often have a very difficult time offering an affirmative description of what they did, why it worked, and how they kept the engineering process and the business on track towards the correct goal.  If robotics is ever going to be the semi-conductors of the 80’s, web of the 90’s, or social and mobile of today, our industry will need to develop a compelling description of how to stay on track towards successful technology and business outcomes.

Incubation in the Clusters

Once again, Silicon Valley is showing the rest of us how its done (see “Incubation” for the data).  Robotics only feels like it is poorly incubated in the Valley, because it doesn’t have incubators with multiple branches in the Valley like biotech and software do.  At least traffic sucks so bad in the Valley that when robotics gets going in the Valley it will need multi-branch robotics incubators just so people won’t have to drive.

All jealousy of California’s good fortune aside, robotics businesses are hard to start.  Not only do they have all the complexities of a software business (with a much more challenging test cycle), but they also have other parts that are equally challenging.  They are a hardware business, a manufacturer, and often a distribution or operations company as well.  I don’t see too many 22 year old college drop-outs running manufacturing and distribution businesses–they are too complex and require too much capital to just let them fail like a VC can do with a mobile app company.  Hence these kinds of companies are run by people who know what they are doing.  How do we create more entrepreneurs who ‘know what they are doing?’

For robotics to take off, we are going to have to find models that produce profitable companies with much less wasted capital than software venture capital does.  Incubation and mentorship are probably going to be really key to making this happen–good job to the Bay Area for getting on this.  If community leaders want to lay the foundation for something really extraordinary in their community, get a robotics incubator going in your community.

Cluster Activities (Continued)

The Massachusetts Tech Leadership Council is a really great organization.  I’m not sure how they get their members to pony up for the services that they provide (I’d like to know for my activities in Pittsburgh!), but having a professional cluster organizer like Elizabeth Newstadt and an organizational hub for promotion of the entire industry is fantastic.  I’ve heard that there are some frictions from the fact that the cluster crosses state lines and it is the “Mass TLC” as opposed to a New England-wide organization.  Still, the degree of organization that the cluster centered on Boston has is astounding.  A good deal of credit for this goes to the Mass TLC.  As an example, the survey they do of the robotic cluster is fantastic.  The other clusters should undertake similar surveys which would increase the value of Boston’s survey exponentially.

On the other coast, the San Francisco Bay Area is clamorous and still fairly ill defined–by which I mean there are a lot of people who may or may not be a part of the robotics industry.  Many robotics people think of themselves as being in the medical device industry, software, or electronic hardware–but not necessarily robotics per se.  On top of that, tons of people in the Bay who are not in robotics professionally provide the clamor and enthusiasm.  For example, all of my personal friends that build and fly drones for fun live in California.  I’m from back East, so the selection bias should run against the Bay.  They just love technology, nerdiness, and doing “your own thing” in the Bay–and robots fit the bill perfectly.  In fairly short order, I suspect that Andra Keay and the other folks behind the Silicon Valley Robotics Cluster and Robot Launch Pad will provide some of the rally flags to bring order to this energy–then the valley will be a sight to behold.  The Silicon Valley robotics people I’ve met think that their community needs to catch-up to Pittsburgh and Boston, but this probably only makes them dangerous since my data is starting to show that they are equal anyone.

Pittsburgh is a small community.  It is really great–everyone is super friendly and if you’re in robotics everyone knows everyone.  If you find yourself in Pittsburgh, I would be happy to introduce you to them and they will be nothing but good to you.  Things can happen really quickly because there is high degree of trust and community spirit.  My personal take on the robotics community in Pittsburgh is that there are things that need to be done collectively to get to the next level (VC education, a robotics incubator, more diversity of academic research, etc.).  The personal dealing model is going to be helpful, but not sufficient, to get the Allegheny robotics cluster to grow to the size that the region wants it too.  More formal organizations, supported by bottom-up enthusiasm for things like happy hours, meet-ups, and demos is going to be required for the Pittsburgh robotics cluster to scale.