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April 6, 2021
The investment landscape in the Robotics, Automation, and Artificial Intelligence (RAAI) sectors is at a critical inflection point, and well-positioned companies are poised to receive attractive valuations as new classes of investors angle to make their footprints in the space. A wide swath of new technologies—not just in pure RAAI but also in adjacent areas like space exploration, gene editing, and blockchain—are prompting a blurring of the lines of the investor categorization we have all come to know.
In addition to the usual strategic investors, VC funds, and growth equity funds, there are also PE funds, hedge funds, pension funds, and SPACs (Special Purpose Acquisition Companies) actively investing in the sector. SPACs specifically are aggressively investing in companies with leading technologies in sectors they believe will have explosive growth over the next five to ten years, like Autonomy and Urban Air Transport, Energy Tech/ESG, and Supply Chain. Hedge funds are increasingly joining or leading large capital raises, such as Alkeon Capital Management’s investment in UiPath and Coatue Management’s investment in DataBricks.
Akin to the $13 trillion market generated by the advent of the Internet, the Fourth Industrial Revolution is expected to generate up to $100 trillion in market capitalization and value in the next five to10 years. Investors’ desire to participate is high, but there are a few key things RAAI companies (and their VC backers) should note while preparing to make future M&A or capital-raising moves.
Our RAAI investment banking practice group is in regular contact with investors and strategic buyers in the space. Here are the top five takeaways from our recent conversations:
If a potential path for your company’s future is an acquisition by or investment from a strategic, you’d be well-served to lay the groundwork with potential acquirers early on. Although it may still result in significant interest or even a completed transaction—approaching a strategic buyer cold at the start of a transaction process will require more time and resources to establish the level of comfort and familiarity needed to move forward with a deal.
Alternatively, suppose the buyer has been a customer or user of the technology for some time, and its engineering team and various business units are already believers in your offerings. In that case, their experience can reflect favorably in their willingness to entertain a deal and sweeten the valuation. Additionally, during buyer/investor diligence, technology diligence can usually be the most extended portion—in some cases taking months. Intimate knowledge or even familiarity with the technology can shorten this process.
Some RAAI companies hold their information close to the vest while iterating and developing their technology, afraid of what others may do with the information or fearful that the technology is not fully baked or ready for customer view. We have found that while an accretive bolt-on acquisition is attractive to buyers, earlier-stage companies in this space may be seeking a sale before they are profitable. Having an internal champion at a buyer who can make a case for the acquisition through their own experience with the technology is extremely beneficial. This path could lead to a full sale, but more commonly, the company is primed to make an investment in your business and could be part of your next capital raise.
Additionally, developing these relationships may help shorten your technology’s value proposition from “potential” to “proven.” It’s one thing to have novel AI or automation technology, but you need data to advance it to its full capacity. Sophisticated automation takes time and requires large data sets to mature. Strategic partners often have access to large databases of information that may be able to feed your technology and help it learn.
Investors’ actions reflect that they are most interested in the companies with which they already have strong relationships and a pre-established comfort with the technology, in addition to a strong projected growth story. Focus on building connections where eventual M&A opportunities are the greatest. We see the most successful outcomes for companies that collaborate early with potential acquirers rather than doing everything internally then taking their tech to market.
We often see startup owners intensely focused on creating the best technology—and while this is a noble pursuit—failing to simultaneously identify its applicable use cases in the market is a misstep that can hamper the company’s M&A and capital-raising opportunities.
Many companies are creating exciting technology, but upon digging a bit deeper, they may realize they are developing a product for which no one is asking. Developing innovative technology for a defined use case in attractive end-markets is a better approach. Investors and buyers will want to know the TAM for your solutions, specific use cases for your product’s technology within those end-markets, and ideally—be able to prove viability with customer reference points. Investors have shown they want to ensure the technology they are backing has long-term commercial potential.
We have seen the most successful companies create version 1.0, deploy it with customers, gather feedback, and iterate based on that feedback. Engaging with and listening to your customers will help you tailor your solution to meet the market’s long-term needs.
Technology inventors and engineers often have an incredible ability to focus, which sparks many of their remarkable achievements. But being too focused on too small of a problem—perhaps just one part of a much larger issue—can diminish financial returns.
Investors today are most interested in solutions that solve holistic issues or processes, not just one small pain point. As such, full solution/end-to-end offerings are achieving the highest valuations in the current environment. Knowing exactly where you stand in terms of applications and how that impacts valuations—to your benefit or detriment—can help you set appropriate expectations and solve any potential issues that may derail the most optimal outcomes of a capital raise or sale.
Again, communicating with customers can be vital in addressing this issue. Asking them about how technology related to yours can solve some of their larger-scale problems can lead you in the right direction. Investors will want to see a plan for how their capital will contribute to the next stage of growth or new products/services.
Asset-light businesses with significant potential recurring and re-occurring revenue streams, including those with Robotics-as-a-Service (RaaS) or capitalizing on Value-as-a-Service (VaaS) models, have seen recent success in M&A due to the lower customer barrier to entry. If your business has similar qualities, it’s essential to highlight them when considering taking on a potential investment.
Additionally, investors are paying close attention to the cost of providing automation products and services to customers. We’ve seen instances where investors can overlook cash burn—particularly spurred by corporate overhead or investing in sales ahead of growth. Even still, they will be almost singularly focused on the unit economics story to ensure your company has a differentiated ability to scale over time profitably.
Companies that can demonstrate they are lowering their cost curves with scalable unit economics and increasing margins will ultimately be able to achieve higher valuations from investors.
Large companies and investors are looking to see traction in a specific channel or market. Companies that can leverage commercial momentum have more expansion opportunities to demonstrate their ROI to customers, which is desirable to investors and strategic buyers looking to acquire new channels or grow into new markets.
Generally, investors want to see a strong projected growth story with line of sight to the next five years or more of revenue. Successful companies often demonstrate they can reach revenue projections with an existing pipeline of blue-chip anchor customers and new customer generation.
Multiple categories of investors are highly interested in investing in RAAI technologies—so much so that they are, in some cases, fundamentally altering their investment strategies to participate. Knowing their focus areas and sticking points are critical factors in making the best moves for your company. If you would like to understand better how investor appetites apply specifically to your company, please don’t hesitate to reach out to our RAAI team.
Senior Vice President
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