🦾 RESHAPING PHYSICAL INDUSTRIES WITH ROBOTICS

― By Luke Carroll 

In the last five years, the robotics industry has seen significant growth. There are currently 3.5 million robots globally, with a total installation cost of $15.7 billion. Robotics startups have received $90 billion in investments, making up about 10% of total venture capital investments in technology. Western markets, including the US, Europe, and Israel, have benefited the most from these investments, while Asia, especially China, is emerging as a significant player due to its role in sourcing components.

Source: Pitchbook, F-Prime

While promising, the robotics field has faced delays in achieving its anticipated transformation. However, several factors are currently driving growth and adoption in robotics:

1. Technological Progress: Recent breakthroughs, including sensors, 5G connectivity, cloud computing, and artificial intelligence, have propelled robotics into the forefront as part of the Industry 4.0 revolution. Integrating humans into the automation process is essential for success, but investments in infrastructure are also necessary.
2. Demographic Trends: Changing demographics, with an aging global population, particularly in developed countries, have led to labor shortages. Robotics will play a leading role in filling this gap.
3. Economic Incentives: Rising labor costs have made robotics an attractive solution, with the average cost of an industrial robot falling by 50% over the past three decades. This makes robot adoption more appealing, especially in sectors where repetitive tasks can be automated.
4. Geopolitics and Reshoring: Supply chain disruptions, trade tensions, and incentives for domestic manufacturing have led to “onshoring.” In the US, a combination of demands for onshoring, low unemployment rates, and labor shortages are driving American companies to embrace automation.
5. Sustainability: Robots are contributing to reduced energy consumption in manufacturing through new technology that significantly lowers energy usage. Industrial robots also tend to have a service lifetime of up to 30 years, contributing to the circular economy and cost savings.

The Investment Landscape:
 
 Robotics can be divided into three key categories:

1. Autonomous Vehicles (AV): These companies created vehicles and solutions for deploying passenger cars, trucks, and delivery vehicles on public roads.
2. Vertical Robotics: Focusing on specific use cases across various industries such as logistics, medical and defence. This sector has defied market trends and continued to grow, even in 2022. Escalating labour costs and shortages have fuelled customer adoption.
3. Enabling Systems: These are the companies developing solutions for the development of robotics, such as hardware and software components (e.g. Sensors and AI models)

Spotlight Sub-sector: Autonomous Vehicles (AV)
 
 One key vertical for VC investment in robotics and automation has been on Autonomous Driving. This is a sector that has been hyped for 18 years, with over $100B+ invested and 20 million miles of testing already completed. These investments have led to only several pilot programs in majors’ cities (Phoenix (US), Arlington (US), Stockholm (SW), Singapore (SGP) and Hwaseong (KR)), and restricted product offerings for industry leaders like Cruise, Waymo, and others.
 
 So why was there slow progress until now? Historically, the challenge was the high cost of infrastructure (GPS, Lidar, Compute costs, etc.) and a rules-based approach where decisions were made based on prior training. Newer models use neural networks for intuitive driving, similar to human navigation. Instead of relying solely on prior training, these models learn from off-policy data, observing any driver and running numerous simulations to enhance learning. Two good examples of similar models are:

• Example 1: Google’s Search function learns from off-policy data, observing all users’ search behaviour and learning when the system does not provide the best match. The next searcher will have a better result. Imagine if Google’s search algorithm only learned by observing an internal team of “Google-employed searchers” who were responsible for searching “the correct” way to resemble all habits / behaviours / techniques across the world. That would not scale and would result in a terrible customer experience.
• Example 2: GPT-3 scanned the internet and read everything from Shakespeare to others, not only learning the behaviour of the best writers, but also the worst.

Leading examples of this off-policy learning model are Tesla in the US and Wayve (Reference Capital portfolio company) in Europe.
 
 Morgan stanley recently released a 33 page investment note on Tesla, in which they believe that Tesla’s “supercomputer”, Dojo, can add up to $500 billion to Tesla’s enterprise value, expressed through a faster adoption rate in Mobility (robotaxi) and Network Services (SaaS). Additionally, a McKinsey study also projected $300–400B revenue potential by 2035 for autonomous vehicles.

While there is a lot of promise coming from these new methods, some elements of the model come from video and other sensor data, which is fundamentally different from text. Learning from video data requires a lot more computer power than processing text, and making fundamental advances requires exponentially more compute power. That said, one key dynamic that is currently changing is the significant amount of investment in compute power infrastructure in anticipation of the AI wave. This could be the unlock that the industry needed for AD to reach its true potential.
 
 Rise of automation and robotic unicorns in Venture Capital:
 
 In the past five years alone, an impressive 38 robotics unicorns have emerged, underlining the industry’s growth. Mergers and acquisitions (M&A) have proven more productive than public offerings, with a remarkable $20 billion in exit value. It’s worth noting that many of these companies are still privately held, boasting high valuations; they will still have to justify these valuations.
 
 Seth Winterroth, a successful robotics investor and Partner at Eclipse, believes that companies in the space follow a cycle of obscurity before breaking into the mainstream. He cites the acquisition of Kiva Systems in 2012 as a turning point for the sector, proving robotics’ practical applications. However, many startups face challenges due to the complexity of robotics. Yet, with advancements, it’s becoming easier to build robotics companies, with many now generating significant revenue.
 
 Seth observes common mistakes among robotics startups, such as rushing commercialisation and not engaging enough with customers. He emphasises the importance of understanding customer needs before product development. Highlighting innovative companies, Seth mentions Third Wave, which focuses on automating forklift operations, and Foxglove, which offers tools for robotics development.
 
 What’s to come for automation and robotics:
 
 Seth from Eclipse believes that understanding the past can provide insights into future market trends and opportunities. Historical patterns show that today’s cloud computing world evolved from personal computing in the late 1970s, through networking, the internet, and mobile technology. A similar pattern is emerging in physical industries, indicating the onset of a new computing revolution.
 
 He mentioned two factors that historically held the industry back but were now potentially driving force for increased adoption in physical industries poised for disruption:

• Tech Talent Market Evolution: There’s a talent shortage in physical industries, but a surplus of tech professionals due to recent layoffs. This presents an opportunity for tech professionals to apply their skills to physical industries, leading to innovation and growth.
• Evidence of Real Business Outcomes: Emerging technologies in physical industries are showing tangible results. For instance, industrial companies plan to spend 25% of their capital on robotics and automation in the next five years. Amazon’s success with automation in logistics is a prime example of the potential of automation in physical industries.

Conclusion:
 
 The robotics industry is experiencing a renaissance driven by technological innovation, changing demographics, economics incentives, geopolitical factors, and sustainability concerns. Together, the three categories of Robotics (Autonomous Vehicles, Vertical robotics, and enabling systems) are poised to disrupt a majority, if not all, industries.
 
 While we believe there is significant promise in automation and robotics, we also need to consider some of the current downside effects such as; replacing human roles and time taken to reskill, current robotics technology still requires human command for the most part and is still mostly short of human abilities. Additionally, while we believe there is a lot of promise on the horizon it’s hard to ignore the issues that reshoring faces. Asia has been an early adopter of robotics, particularly in logistics, playing a crucial role in the supply chain for robotics components. China, in particular, has become a significant supplier in this thriving ecosystem. Building these operations in the US will have increased cost and take increased time in the current environment. Leading western governments to significantly invest in the industry and actively seeking geopolitical alliances.
 
 Overall, we strongly believe the current global scenario combined with significant investment in compute infrastructure (more below under “The AI Boom: Nvidia and the $200B Question”) makes it an opportune time for automation in physical industries. Autonomous systems will be pivotal in driving these industries, presenting vast opportunities for innovation and investment and will also provide much needed improvement for global growth numbers.
 
 Read more on the topic ⬇️

The State of Robotics Report — by F Prime Capital
 Investing in Robotic — by Black Rock
 13 VCs talk about the state of robotics investing in 2023 — TechCrunch
 Robotics Outlook 2030– Boston Consulting Group
 2023 Robotics Predictions from industry experts
Seth Winterroth on the Joys and Challenges of Working with Robotics Startups
 Autonomy will Revolutionize the Next Decade of Innovation in Physical Industries — Eclipse — Eclipse
 Spotlight: Seth Winterroth on the Joys and Challenges of Working with Robotics Startups — Foxglove — FoxGlove
 Autonomous driving’s future: Convenient and connected

In case you missed it…

General Technologies 🚀

🚀 Venture Capital Outperformance Requires a Targeted Approach
 
 Venture capital’s secret to success? A laser-focused, strategic approach! Here are some highlights:

📈 Early Decisions Matter: Recent data from Morgan Stanley and Cambridge Associates reveals that early VC choices can yield results that outshine public markets.
 
 🏆 Top Quartile Dominance: Between 2005–2015, top quartile VC surpassed indices like the Nasdaq by an average margin of 23%.
 
 🔑 Size and Stage: Preqin’s research indicates that smaller VC funds (below $500m) and early-stage funds tend to yield higher returns.
 
 🌟 Manager Track Records: Steven Kaplan from Chicago Booth emphasizes that managers with a proven track record consistently deliver high returns, enhancing their portfolio companies’ market appeal.
 
 🔄 Diversification Benefits: VC offers minimal correlation with other asset classes, making it a prime diversification choice, especially during downturns.
 
 💡 Final Thoughts: Success in VC demands precision and a keen eye on early-stage investments. It’s not just about outperforming but also about resilience, making VC an attractive choice even during economic challenges.

➡️ Full article for deeper insights: Venture Capital Outperformance Requires a Targeted Approach — VDK Capital

💥 The AI Boom: Nvidia and the $200B Question
 
 The Generative AI industry is on fire, with Nvidia’s robust financial performance underlining the skyrocketing demand for GPUs and AI model training. While products like #ChatGPT previously brought AI into the spotlight, Nvidia’s results have turned the attention to its immense monetary potential.

🔍 But here’s the catch:
 
 For every $1 spent on a GPU, an equal amount is invested in energy costs for data centers. This means significant revenues must be generated to justify these investments.

✨ The golden question:
 
 How much of this colossal capital expenditure on data centers is meeting the current end-user demand versus what is constructed in anticipation of prospective end-user needs? This poses the $200B dilemma.
 
 The takeaway for startups?
 
 This represents a golden opportunity for startups to leverage AI and deliver genuine customer value. With ample AI infrastructure in place, it’s high time to focus on products that resonate with consumers.

➡️ Read more about it: AI’s $200B Question — Sequoia

Sustainability 🌍

🥤 Plastic’s Environmental Dilemma
 
 Plastic, while an economic boon, is an escalating environmental concern. As we project a possible tripling of its production by 2060, it’s high time we address not only the material itself but the glaring inefficiencies in its waste management.

The Scale of the Challenge:

Plastic Produced: An astonishing 11 billion metric tons.
 But what becomes of it?
 
 ♻️ Recycled: Only 9%
 💨 Landfills: A whopping 72%
 🌊 Oceans: Between 8–11 million tons every year

Core Challenges:

♹ Diversity in Types: Of all, only PET (#1) and HDPE (#2) see frequent recycling. Varied plastic types pose a recycling challenge. Chemical Recycling, once touted as the solution for mixed plastics, is now deemed unviable.

❌ Unrecyclable Plastic: Thermoplastics can be repeatedly melted and reshaped, while thermosetting plastics resist such processes.
 💸 Economics: Virgin plastic, often cheaper, overshadows recycled counterparts because of high recycling costs and oil & gas subsidies.
 ☠️ Safety: A Canadian government report found that the majority of recycled plastic was unsafe as they contain toxins.
 
 The Microplastics Threat:
 
 Non-recycled plastics degrade into microplastics, with humans potentially consuming up to 52,000 particles annually.
 
 Seeking Viable Alternatives: 
 
 🫙 Glass: Reusable and recyclable BUT has transportation and energy challenges.
 🥫 Aluminum: Recyclable BUT can release toxic gases during recycling due to plastic linings.
 🧃 Paper: Recyclable BUT has an environmentally damaging recycling process and limitations in packaging liquids. For instance, paper straws are less eco-friendly than plastic ones due to a recent study revealing they contain more persistent chemicals.
 
 The Takeaway? 
 In conclusion, our challenge isn’t merely plastic’s existence but our handling and management of it. We require innovative alternatives and a complete overhaul of our waste management strategies for a sustainable future.

➡️ For an in-depth understanding: Think your plastic is being recycled? Think again. — MIT Tech Review

⚖️ Carbon Credits: Controversies and Reforms

Carbon credits, mechanisms for offsetting emissions, are under fire due to alleged malpractices in their certification and application, raising questions about their authenticity.

Key Controversies:
 
 🎓 Verra: Investigations suggest 90% of forest carbon offsets, linked to major brands like Disney, Shell, and Gucci, might not represent real carbon reductions.
 
 🐧 South Pole: Accusations state that its Kariba project in Zimbabwe inflated carbon credits by up to 30 times their actual value.
 
 Market Impact:
 
 These revelations caused a 6% decline in credit utilization in H1 2023, as per BloombergNEF. However, there’s a silver lining:
 
 ♻️ Internal Decarbonization: Brands like Nestlé are focusing on in-house emissions reduction.
 
 🎖️ Quality Over Quantity: Companies are gravitating towards premium carbon credits.
 
 Beyond the Noise:
 
 📄 Ecosystem Marketplace’s research indicates that numerous firms in the voluntary carbon market aren’t merely greenwashing; in fact, they often stand out as climate leaders, actively investing in emission reductions, science-backed targets, and comprehensive decarbonization.
 
 Going Forward:
 
 🎯 It is essential to understand that the goal isn’t to demonize corporations but rather to differentiate between those obstructing environmental progress and those championing sustainable alternatives. As carbon credit demand surges, startups are emphasizing measurement accuracy, transparency and traceability.
 
 🔜 Moreover, upcoming COP28 discussions in November might bring pivotal regulatory changes, notably in carbon market standardization, heralding a shift to a more accountable, green future.

➡️ Click on the following link: The voluntary carbon market: 2022 insights and trends, to learn more about carbon markets.

Blockchain & Crypto 💸

📈 Market Update

🏦 The SEC has been busy in the past few weeks:
 
 ➤ ETF:

• The SEC has approved the listing of Ethereum Futures ETF, subsequently launched by industry giants VanEck, Proshares and Bitwise.
• The SEC has postponed the decision on the Ark 21 Shares Bitcoin Spot ETF application to January 2024.
• Grayscale, Ark 21, Fidelity and BlackRock amended their application.
• BlackRock registered their spot Bitcoin ETF with Nasdaq Clearinghouse.

➤ Binance:

• The SEC received criticism but also garnered support from Paradigm and Circle amidst the ongoing legal dispute.

➤ Grayscale:

• Grayscale secures court approval in battle with SEC over Bitcoin ETF.

➤ Ripple:

• The SEC’s request to appeal was denied.
• They decided to drop charges against Ripple’s co-founders.

🏁 The race for regulation continues outside of the US:

• GSR and Coinbase, Ripple obtain payment licenses in Singapore.
• Coinbase secures Bank of Spain registration to operate their exchange and custodian.

🔎 Research:

⛓️ Kyle Samani (Multicoin) discusses the future of on-chain confidentiality through their latest investment in Fhenix.

🔎 Nichanan Kesonpat (1kx) explores the evolving world of Dynamic NFTs, detailing their mechanisms, applications, supporting platforms, and the potential they hold in revolutionizing digital assets and interactive gaming experiences.

💰 Matti (Zee Prime) criticizes the overemphasis on blockchain infrastructure funding by major VCs, suggesting it leads to a circular developer-to-developer ecosystem without genuine end-user value.

🎙️ Podcasts & Recordings
 
 Last month, we were at Mainnet 2023 — here is a non-exhaustive list of the sessions that we liked:

📹 Nic Carter discusses the current state of stablecoins
 📹 Robert Leshner on DeFi in RWAs
 📹 State of the cycle with Raoul Pal
 📹 Why AI needs Crypto

Last but not least:

🎙️Bankless welcomes Fidelity to discuss their latest investment thesis on Ethereum.
 📹 Multicoin published on their website the recording of their annual LP meeting.

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