Robohub: What funding scheme is most conducive to creating a robotics industry?

money robotRobohub just posted a great series on optimal funding schemes for robotics start-ups.  I highly recommend reading it.  I believe that it probably represents the best collective wisdom in our industry.  Frank Tobe probably has the most informative response for someone actually looking to raise money: robotics is still at the point where you need to appeal to individual personalities who see it and get it, or find a government customer.  However, I thought that all the authors raised thought provoking points.  Here are the follow-up questions that I posed:

Rafello D’Andrea:  What structural and cultural changes need to be made to robotics departments so that they become as entrepreneurial as computer science or biochemistry departments?

My own observation is that here at CMU–one of the most prolific robotics start-up hot beds–that robotics is pretty theoretical and academic compared with other engineer disciplines, particularly other disciplines in the computer science school.  The revolving door between industry and academia just doesn’t happen in robotics the way it does in other disciplines.  How do we get industry thinking into robotics departments?  After staying close to the university for 40 years, it is going to be hard to change the culture of the robotics departments, however I think that universities that succeed have a chance to maintain or overtake the currently established leaders in the field.

Henrik Christensen:  If much of the benefits from robotics R&D accrues to parties who didn’t do the research—whether competitors or society at large, economics tells us that subsidies are not only appropriate, but necessary, to get to the socially optimal level of investment. What portion of the gains from commercial robotics R&D is controlled by the company that does the research?  How does this compare with other industries?

I know the Georgia political climate is such that private industry is always the answer.  We all agree on the need for more private investment, but if robotics companies have trouble capturing the value that they create, we need to do one of two things:  1) Either subsidize their research in some rational way that creates the most social gain or 2) adjust intellectual property laws so that more of the benefit of robotics R&D accrues to companies making the investment.  Some econometric research is probably in order here… any econ Ph.D. candidates reading?

Mark Tilden:  Doesn’t your suggestion of investing in crowd funded start-ups point at the opposite of needing more innovative roboticists?  If crowd funding is the shining star in our industry, wouldn’t that suggest that our roboticists are plenty innovative—as high end research is not required to make marketable stuff—but rather our entrepreneurs and business managers are behind the power curve?

Obviously, market traction is the key.  Financing is for companies is in some way just a loan to future consumers–even if the consumers don’t know it.  This question of what’s the real roadblock to creating more successful robotics start-ups is a key one.  I’ve made my belief that the robotics “parts bin” has plenty of technology in it pretty clear on this blog as well as my belief that robotics has a shortage of qualified entrepreneurs and managers.  The problem is not on the engineering side, it is with those giving directions to engineering.

Frank Tobe:  If the individual / angels / VC route is more of the direction that we want robotics to go in, what do the special people that you point to in your response see that other investors don’t see?  Or are they doing something different?   What is the barrier to other investors who might want to do the same?

If robotics is at the point where it is being funded by visionaries, how does one go about finding, cultivating, or creating more?  Are the visionaries right or is their compass off?  I don’t have good answers to this, but I do think that robotics seems to require a more comprehensive understanding of engineering, current business practices, and what the future should be than most other industries do.  That said, one would expect that there are extraordinary rewards for solving these hard problems, unless some of the basic economic problems that I want to suggest in my question to Henrik Christensen exist.

Nicola Tomatis:  Software and biotech companies aren’t cheap to build in absolute sense either, but they are called capital efficient by investors.  Financially, robotics is probably more like software and biotech than it is like retail or [green] energy businesses—which really require a lot of money.   Is there data that supports the position that robotics is expensive compared to other capital efficient industries?

The part of this blog I’m most proud of is gathering the evidence to show, to a practitioner’s standard, that robotics companies are as  capital efficient as software companies, conditional on success for both.   While plenty of robotics companies waste investors money, I’m not sure that this that different from any other IP intensive industry.  However, whenever a software company fails we blame management or the market–but when a robotics company fails we blame the underlying technology.  We need to stop that.  It makes it harder for the next guy to start a robotics company–the underlying technology is there–we just haven’t made many companies with it yet.

The Knowledge Economy Cash Anomaly, Part 3: The exciting conclusion

This is part 3 in a series.  Here are Part 1 and Part 2.

Tax Shields 

The organization of the knowledge economy is inclined towards creating great tax advantages.  Both start-ups and mature companies enjoy huge advantages that the resource economy does not enjoy.  Most investments can be expensed.  The companies grow fast enough that they create huge tax losses, even as they create extraordinary value for the owners.  Once they become mature global companies, their assets can be transferred almost costlessly to whatever jurisdiction offers the most favorable treatment.  Transfer pricing makes it almost impossible for authorities to tell where value was added.  Money generated off-shore can stay off-shore tax free indefinitely.  In contrast, resource economy companies have easily traceable assets, some of which require particular locations and may be quite literally fixed to that location.  Their assets are comparatively easy to tax, whatever form their assets take.

If this is the case, it follows that knowledge economy companies have huge tax shields from their operations.  To have these tax shields add value to the business, the CFO of a company needs a business that is low risk, earns the cost of capital after tax, and does not consume much management attention.  Investing in marketable securities seems like just the ticket.  The gain on securities allows the owners of the company to take advantage of the tax shields that would otherwise go unused.

Here is what we’ve been looking for all along.  A reason why cash is better off in the pocket of the company than in the pocket of the owner.  In addition, all the other reasons why a firm might hold so much cash are still active and valid.  Full use of tax shields would be a driving factor for keeping cash on the balance sheet.  The discount rate for tax shields is low and even if only gets used every few years, it adds to the wealth of the shareholders.  For a founder, cash on the balance sheet capitalizes an otherwise unused tax shield, provides diversification, defends the core business, and enhances the value of R&D investments by its mere presence.

The question for further study would be when we would expect to see these benefits diminish?  Can we empirically test which of these hypotheses are most important in guiding payout policy?

Which VCs are investing in robotics? Here is the list.

the instrument of venture investment

source: SEC.gov

My overview of the Firms Behind the Hizook 2011 VC in Robotic List has graciously been published at Hizook.

Bottom line:  We don’t have a cadre of dedicated robotics investors, but we can get investment from the industries that serve as our customers.

I wish you all luck in getting some of that VC Cash.  …on second thought, no, actually, I don’t–I  wish you all luck in signing up major partners who will give you progress payments to complete your product without diluting your investment.

But whatever your situation I hope that you use the appropriate capital structure to make lots of robots, lots money, and lots of good in the world.