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The Future of Robotics An Inside View on Innovation in Robotics

FEATURE , Humans and Work Executive Summary

Robotics in the Startup Ecosystem The of production through three industrial revolutions has increased global output exponentially. Now, with machines increasingly aware and interconnected, Industry 4.0 is upon us. Leading the charge are fleets of autonomous robots. Built by major multinationals and increasingly by innovative VC-backed companies, these robots have already become established participants in many areas of the economy, from assembly lines to farms to restaurants. Investors, founders and policymakers are all still working to conceptualize a framework for these companies and their transformative Austin Badger . In this report, we take a data-driven approach to emerging topics in the industry, including business models, performance metrics, Director, Frontier Tech Practice and capitalization trends. Finally, we review leading of how automation affects the labor market, and provide quantitative evidence for and against them. It is our view that the social implications of this industry will be massive and will require a continual examination by those driving this technology forward.

The Future of Robotics 2 Table of Contents

4 14 21 The Landscape VC and Robots Robots, Humans and Work Industry 4.0 and the An Emerging Framework Robotics Ecosystem The Interplay of Automation and Labor

The Future of Robotics 3 The Landscape Industry 4.0 and the Robotics Ecosystem

The Future of Robotics 4 COVID-19 and US Manufacturing, Production and Nonsupervisory Workers the Next 12.8M Automation

Wave 10.2M

Recessions tend to reduce 9.0M employment, and some jobs don’t come back. This trend is 1 glaring for US manufacturing 7.8M in the prior two downturns as 2011 2012 2017 2013 2015 1997 1995 2018 2014 2016 2019 1998 1996 1999 2001 2010 2002 2020 2007 2003 2005 2008 2004 2006 2009 businesses reconsidered their 2000 supply chains and looked to Automation Stock Performance move production offshore or April 14–May 14, 2020 Share of executives investing to automate. The pandemic’s in accelerating automation effect on global supply chains due to COVID-19 has made the offshoring ROBO Index 2 option problematic, increasing S&P 500 41 percent the likelihood that this cycle +3.3% Forecast 2021 robotics will see an increase in market size after COVID-19 investment in automation. -1.5% 3 Executive surveys and $23 billion robotics stock performance 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 indicate this has started. Days since April 14

Notes: 1) Preliminary reading. 2) Based on Ernst & Young survey results. released 3/30/2020. 3) Based on ABI Research study results released 4/2/2020. Source: Bureau of Labor Statistics, S&P Capital IQ, Ernst & Young and ABI Research. The Future of Robotics 5 Production US GDP per Capita through Four Industrial Revolutions Over the First Third Fourth Two Watt’s steam engine The internal combustion The advent of Frontier like 3D becomes an energy engine and electricity computing is printing, IoT, AR/VR and AI source for industry and enable the operation of applied to promise to make industry Centuries transportation. Textile larger factories and new industry, enabling fully digital. A new innovations, such as modes of transportation. increased task generation of industrial the power loom, Telegraph and telephone automation. The robots can more fluidly Global civilization has drastically increase drive a concurrent applied robotics integrate with a factory, grown exponentially British output. communications industry is born. learn new tasks, and work revolution. safely alongside humans. wealthier and more An unprecedented amount of data productive through three is generated. industrial revolutions. A fourth is now underway, one which promises to unlock new opportunity, but may also unleash transformative shifts for labor, industry, and society at large. 1790 1840 1890 1940 1990

Source: Barro-Ursua Macroeconomic Dataset. The Future of Robotics 6 The Fourth BCG Constituent Technologies of Industry 4.0 Industrial Revolution Is Upon Us Additive A confluence of technological Manufacturing advancement in various fields has allowed entrepreneurs to develop solutions to common Big Data Analytics problems in industry. These solutions are far from isolated and cross the digital and physical realms. Robotic performance of tasks is a key element in this interplay. In a Augmented Robotics Internet of Things recent cross-industry McKinsey study, 70% of surveyed executives said they expect advanced robotics to become a very important productivity Vertical and Horizontal Cybersecurity driver by 2025. System Integration

The Cloud

Source: Boston Consulting Group. The Future of Robotics 7 Driven by Annual Installations of Industrial Robots by Region Asia, the Thousands of Units CAGR % Industrial North America Europe 69 9% Robo-force Asia/Australia 64 Swells 87 8% 59 Annual installations of 83 industrial robots have more 55 54 46 than doubled since 2013, 79 1 74 growing at 18% CAGR . This 67 76 is expected to slow in the next four to 9%. China 41 has led the way, increasing 38 56 420 17% its stock of industrial robots 33 50 nearly fivefold. 368 30 46 320 28 280 283 285 While impressive, this rate 43 41 200 of growth is not tremendous. 161 134 Innovating the existing stock 85 99 of robots is a compelling opportunity, as is expanding 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 that stock. Projected

Notes: 1) CAGR = Compound Annual Growth Rate. Source: International Federation of Robotics. The Future of Robotics 8 Robotics Three Virtues of Modern Applied Robotics Enjoys Unique Advantages There are three key features that robotics apart from Closed Environments Immediate Value Data Acquisition other thriving sectors. Unlike other autonomous hardware Innovation can occur The boldest applications Many industries have grown such as AVs, many applied without physical interaction may seem distant (e.g., used to an abundance of with an end customer. humanoid assistants), data; the primary and robotics use cases occur in Robots safely operate within but startups and corporates secondary sectors are closed and well-mapped constrained and less- are finding immediate behind this curve. Inserting environments, thereby trafficked environments. success deploying robots to robots into production This significantly reduces achieve specific tasks. ROI environments unlocks new reducing engineering engineering problems, and can be immediately streams of physical data, problems. In many allows machines to learn achieved for repetitive catalyzing positive feedback industries, robots can add faster while producing tasks, such as agtech use loops that further optimize insightful data. cases, or in scenarios where production. immediate value and unlock overnight work enables visibility into new step-ups in productivity. productive data.

The Future of Robotics 9 VC Appetite Global VC Investment in Robotics and Related Hardware for Robotics Growing Fast 201 2–201 9 CAGR

Venture investment in Robotics VC 55% companies building robots or related hardware has All VC 23% exploded over the last 789 $5.4B business cycle, topping $2B in 746 the first quarter of 2019. 681

Investment in robotics has 606 significantly outpaced the rest Capital Invested $3.9B 531 of venture, making robotics Deals one of the hottest sectors of $3.1B the decade. Near the beginning of 2018, growth in 310 deal count stalled, while $1.8B $1.8B dollars invested continued to rise. This suggests that 164 category leaders are 112 75 $0.6B 43 58 beginning to be established. $0.3B $0.4B

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: PitchBook. The Future of Robotics 10 VC Challenges Public Robotics Business Revenue and Robotics VC Investment

Incumbent Public Company Revenue1 Venture Capital Investment2 Strongholds (Global Share by Region) (Global Share by Region) The market for industrial 39% 3% robots is dominated by 26% 0.5% large public companies, with a handful of Japanese 17% 55% conglomerates ahead of the pack. 14% 1% 2% 26% VC investment in robotics startups is, by contrast, concentrated in the United 2 States and China. VC Investment in Robotics (201 3–201 8)

This is both an indication of where the larger industry may shift in the future and a competitive risk for incumbent firms, which has already motivated several $11B $5B $4B strategic acquisitions. Rest of World

Notes: 1) Encompasses robotics-related segments of public companies, where reported, for 2018. 2) VC investment calculated for 2013–2018 VC investment in robotics and related hardware startups. Source: S&P Capital IQ and PitchBook. The Future of Robotics 11 Percentage of VC Deals by Stage Robotics Robotics Hardware Companies Startups Cross the Seed Early Stage Later Stage Early Stage 12% 13% 16% An increasing share of 20% 17% 17% 19% robotics venture deals is comprised of Series A and B rounds, with seed representing a declining 50% share and later stage 38% 45% 47% 55% holding steady. This 56% 56% suggests that in the coming years we will likely see more later stage activity as the market matures. The next phase of segment maturity will be a surge of later stage 42% 38% 36% 38% activity. 32% 28% 26%

2013 2014 2015 2016 2017 2018 2019

Source: PitchBook. The Future of Robotics 12 Robotics SVB Robotics Market Map1

Solves Many Industry & Agriculture Service & Consumer Different Problems Manufacturing/Supply Chain Food Like AI or cloud computing, robotics is a general purpose technology capable of adding value to a wide range of industries. Robots are Construction Consumer Tech increasingly prevalent in factories, farms, warehouses, hospitals, homes, and elsewhere. This market map is not exhaustive, but it shows some exemplars in identified categories. Agriculture Research & Other Service

Notes: 1) Includes a selection of representative companies; not exhaustive. Source: SVB Analysis. The Future of Robotics 13 VC and Robots An Emerging Framework

The Future of Robotics 14 The RaaS Robot-as-a-Service Metrics Software-as-a-Service Metrics : Customer Acquisition Cost Customer Acquisition Cost

SaaS Meets (S&M1 + Hardware Cost)/(ARR2 × Gross Margin) (S&M/(ARR2 × Gross Margin) Hardware Number of Customers Number of Customers

The most successful and well- Annual Revenue per Robot Annual Revenue per User (ARPU) funded robotics startups have Annual Revenue Annual Revenue adopted business models based on well-known Number of Robots Deployed Number of Customers preferences of venture capitalists, such as recurring Robot Lifetime Value Customer Lifetime Value revenue and a focus on unit Annual Revenue per Robot ARPU economics. Whenever Annual Robot Decommission Rate User Churn Rate possible, enterprise robotics companies should position their robots as recurring Key Differences operating expenditures, not one-off capital expenditures. Revenue Growth: Robotics companies Data Acquisition: An underappreciated will naturally lag software companies feature of robotics companies is their in terms of topline growth. Typical access to unprecedented streams of benchmark growth rates for SaaS physical data. Many applications are in companies won’t translate to environments for which such data does not otherwise similar RaaS models. exist, such as kitchens, farms, and hotels.

Notes: 1) S&M = Sales and Marketing Expenses. 2) ARR = Annual Run Rate. The Future of Robotics 15 RaaS Shifts Business Models Median Revenue Multiple Robot from Business Model Robot as OpEx CapEx to OpEx OpEx CapEx RaaS Fixed: Traditionally, industrial Charging customers a standard contracted amount for services rendered machinery is owned or leased on a monthly, quarterly, or annual basis. 91 – not “subscribed to.” RaaS RaaS Variable: models shift robotic systems Charging a variable contracted amount from a one- capital based on either usage or consumption. Every time the robot executes a task, expenditure to a recurring the company collects payment. operating expenditure. SVB proprietary data show that higher multiples are awarded to robotics companies with Robot as CapEx HW + Maintenance: RaaS models. 37 Customer buys and owns hardware 32 An interesting implication of upfront, and the company then this is that it makes robots provides recurring maintenance and software services. more clearly labor-replacing. Like wages, RaaS fees are One-Time Sale: Sell customer a robot upfront with no 7 recurring payments toward contracted recurring revenue streams an entity that performs tasks. from the customer.

Early Stage VC Later Stage VC

Source: SVB Proprietary Data, PitchBook. The Future of Robotics 16 Don’t Put All Median Revenue/Robot Revenue vs. Robots Deployed Your Eggs in One Robot Round Median ARR/Robot In , maximizing Revenue revenue per robot is a good thing. However, companies should avoid concentrating Series A $75,000 revenue in a small number of robots – even if such a scenario would yield higher Series B $45,333 ARR/robot. As companies mature, we actually observe unit revenue coming down, as sales disperse from a small Series C $31,316 handful of early, quasi-pilot robots to a more robust fleet.

0 20 40 60 80

Robots Deployed

Source: SVB Proprietary Data, PitchBook. The Future of Robotics 17 ARR and ARR Valuation Multiple Expectations, Robotics Hardware Companies Not Sales, Drive Early Early Stage Later Stage Post-Seed 400x Valuations 350x Multiples Less 300x At lower levels of revenue, Relevant at ARR multiples of post-seed <$2M ARR robotics companies vary 250x significantly and can be strikingly high. There 200x appears to be significance ARR Multiple in the $2M annual revenue 150x mark, after which valuations come down as a multiple of 100x revenue and companies grow into their earlier expectations. 50x

0x $0M $2M $4M $6M $8M

ARR

Source: SVB Proprietary Data and PitchBook. The Future of Robotics 18 Investors Run Notable Large Funding Rounds the Gamut Company Deal Size Lead Investor

Venture investment in $940M robotics companies is driven largely by accelerators and $241M incubators, as well as early- $280M stage VCs with a focus on emerging tech. As companies $263M gain traction, investment $186M activity from corporate venture and larger VC firms picks up. Most Active Investors However, activity of some of the most well-known Sand Hill firms has been surprisingly Corporate Venture Capital Traditional Venture Capital Accelerators and Incubators scant. This may soon change as investors build an investment framework and are reassured by successful exits.

Source: PitchBook. The Future of Robotics 19 Mergers and Acquisitions Industrials Robotics and Drone Companies and Ag Lead

Exits 2012 2017 2018 2019 Increased exit activity, highlighted by several large M&A transactions in the industrials and agriculture Amazon acquired Deere & Co. acquired Fanuc acquired Shopify acquired segment, has generated Kiva Systems for Blue River Life Robotics for 6 River Systems returns for investors in the $678M. Technology for an undisclosed for amount. , which will encourage $350M. $450M. continued participation. Notable transactions include 19 major strategic acquisitions 17 by companies relying on robotics solutions, such as 13 Shopify, or by established industrial robotics 9 conglomerates like FANUC. 8 5 8 4

2012 2013 2014 2015 2016 2017 2018 2019

Source: PitchBook and SVB Analysis. The Future of Robotics 20 Robots, Humans and Work The Interplay of Automation and Labor

The Future of Robotics 21 The Industry

Automation Quantity of Human Labor Output Level

Lifecycle Perfect Collaboration A nascent industry starts with Medium automation a small number of skilled Medium output producers in a “cottage Human task performance industry” format, with little to no automation and, therefore, human involvement in every task (e.g., British textiles circa Industry 1.0). As the industry incorporates more machines, productivity enables growth, increasing the demand for ? Reinvestment of human labor. As automation Cottage Industry output and capital deepens to become labor- Model accumulation may displacing, employment begins Low automation stabilize or increase Low output human employment. to fall. Over time, the returns Human task performance from automation can be Automated Industry reinvested in the industry, High automation High output potentially restoring and Machine task performance increasing employment in the long run. Productivity from Automation

The Future of Robotics 22 The Economic Three Mechanisms at Work

Results of Automation Increases Automation Takes Tasks Automation Productivity from Human Agents What will robotics do to the labor market and society at large? The risk that robots will displace human workers is real, but countervailing forces, such as productivity growth and capital Productivity, in turn, has ambiguous Some proportion of those agents will accumulation, may alleviate effects on employment. lose their jobs. its effects in certain industries. We considered Automation Generates three possible mechanisms Wealth by which automation affects employment.

That wealth can be used to accumulate capital, growing the economy and employment.

The Future of Robotics 23 Automation Productivity and Employment

Increases Productivity Employment Productivity US Manufacturing US Private Sector In turn, productivity may Multifactor Productivity and Employment Multifactor Productivity and Employment or may not be associated with increased employment. 105 20M 105 140M In the US manufacturing 100 100 130M sector, periods of 18M productivity growth 120M 95 95 coincided with declines in 16M 110M manufacturing employment 90 90 (though these declines have 100M 85 14M 85 also been attributed to 90M foreign competition). In 80 12M 80 80M the greater private sector, 75 75 however, productivity r = -0.89 10M r = 0.92 70M 70 70 growth has coincided 60M with employment gains. 8M 65 65 50M

60 6M 60 40M 2011 2011 2017 2017 1987 1987 1993 1993 2014 2014 1996 1999 1996 1999 1990 1990 2002 2002 2005 2005 2008 2008

Source: Bureau of Labor Statistics. The Future of Robotics 24 Displacement Risk and Scholastic Performance Automation Reporting OECD Countries Can Displace Labor Share of Jobs with >50% Risk of Automation Share of Jobs with >70% Risk of Automation Scholastic Performance Percentile1 Pre-COVID Unemployment Level The risk of massive displacement is lower in many of the richest nations. Regrettably, those countries 85th 43% 35% 39% 36% 31% with the highest risk of 27% 30% 31% 36% 33% 31%

displacement include some of 30% 32% 28% 31% 33% 27% 29% 29% the lowest-scoring in math, 29% 28% 26% 27% 27% 26% , and reading. These 23% th

26% 60

countries may have a more 26% 23% 22% 22% 20% difficult time adjusting to the 18% 17% 17% 16% 16% 16% 15% 15% 15% 14% 14% 13% 12% 12% 11% 10% 11% 10% 8% 7% changing needs of the labor 6% 10% market, as many experts anticipate that automation US U.K. U.K. Chile Japan Korea Israel France Turkey Greece Poland Austria Ireland Canada Estonia Norway Finland Sweden Belgium Slovakia Slovenia Denmark Germany Lithuania

will shift demand toward Czech Rep. Netherlands more highly skilled workers. ZealandNew 2.1% 2.4% 3.1% 2.8% 3.3% 3.5% 3.7% 3.7% 3.8% 4.1% 4.2% 4.2% 4.2% 4.0% 4.7% 5.2% 5.2% 5.7% 6.3% 6.4% 6.6% 6.8% 7.4% 8.2% 9.6% 13.2% 16.6%

Notes: 1) Measured by mean cumulative Programme for International Student Assessment (PISA) score. Percentiles based on all countries participating in the PISA assessment program, not just those shown. Source: Organisation for Economic Co-operation and Development. The Future of Robotics 25 Automation The Case of the ATM in the US May Spur 2004–2009 CAGR 2009–2017 CAGR Capital 3.6% 2.1% Accumulation 1.7% 0.8% The ATM has been cited as a counterexample to the notion that automation reduces the -0.4% demand for labor. The initial growth of ATMs coincided -2.0% with increased bank teller ATMs Commercial Bank Branches Bank Teller Employment employment. Since 2009, this appears to have Wealth and Capital Formation in the US1 shifted; while ATMs continue to expand (albeit more slowly), branches and teller employment Wealth Capital Formation are in decline. Generally, automation generates additional wealth, which is highly correlated with capital formation. If new capital creates enough new jobs, then the “ATM effect” can occur.

Notes: 1) Figures indexed to Q2 2003 levels. Source: International Monetary Fund, ATM Industry Association, BLS, OECD and Federal Reserve. The Future of Robotics 26 Bold Policy Robot Tax Proposals

Have Gained Policy Policy Traction and Tax the cost of installing robots. Pay a fixed monthly sum to all citizens. Argument For Argument For Wages paid to human labor are already Automation will generate massive wealth Advocacy taxed; machine labor should receive the for a relatively small proportion of the same treatment. Absent this tax, companies workforce. Industry 4.0 will displace The impending shifts in how can reduce their tax base by replacing human labor on a very large scale. An work is done have catalyzed humans. The proceeds could be used to automatic income to all citizens would finance a stronger social safety net for the provide an escape from scarcity so that lively debate over future technologically displaced. they can adjust their skill set for new, more policy approaches. Thought complex jobs. Argument Against leaders in industry, academia Implementation would be made difficult by Argument Against and politics have made the ambiguity of what exactly constitutes a Paying for such a policy would require an robot. In slowing automation, this tax increase in taxes or the national debt, ambitious proposals from a would merely postpone the problem of which would counteract any benefit from tax on the installation of displacement and increase reliance on a the transfer itself. Further, higher incomes bureaucratic social safety net. will be offset by inflation. robotic systems to universal basic income. Proponents Proponents Bill Gates Mark Cuban

Source: Politico and Forbes. The Future of Robotics 27 Report Authors

Austin Badger Evan Oliner Director, Frontier Tech Sr. Associate, Research [email protected] [email protected]

Austin Badger leads a team on Silicon Valley Bank’s Frontier Tech Evan Oliner is a Research Associate based in San Francisco who is Practice in San Francisco. Austin works with high-growth companies responsible for capital markets research and data-driven analysis of that create disruptive technologies in the businesses of robotics, the global innovation economy that SVB serves. In this role, he transportation, connected home, aerospace, consumer electronics, and supports research efforts exploring investment, fundraising and exit semiconductors, with a focus on the convergence of hardware, dynamics in the global venture ecosystem. He is a contributor to the software, and data. The role places him across the table from some of quarterly State of the Markets report. the world’s most innovative deep-technology thinkers and equips him to help bring their bold and audacious visions to life. Evan takes an interest in macroeconomics and international trends. Prior to this role, he worked for a leading economic consulting firm. Austin has held a number of roles at SVB and brings over a decade of He earned Bachelor of Science degrees from the University of investing experience to his clients. A Colorado kid at heart, Austin Southern California, Bocconi University, and the Hong Kong graduated from the University of Colorado and holds a bachelor’s University of Science and Technology. degree in finance. Married and the father of two fantastic young children, Austin can be found tinkering with clients' technology to help optimize every life experience.

The Future of Robotics 28 Disclaimers

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