5 fundraising imperatives for robotics startups

Lidiya DervishevaContributorShare on TwitterAs a partner at Next47, Lidiya Dervisheva works in the areas of robotics, AI and machine vision, as well as broader industrial and enterprise verticals.Fady SaadContributorShare on TwitterFady Saad is the co-founder and strategic partnerships vice president of MassRobotics, the first and largest robotics/AI startup escalator in the world.Bilal ZuberiContributorShare on TwitterBilal Zuberi is a partner at Lux Capital, and is on the boards of Evolv Technology, CyPhy Technologies, and Nozomi Networks, among others.More posts by this contributor

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Early-stage robotics fundraising is accelerating, with funding coming from boutiques to deep-pocketed venture capital firms. For founders, getting their idea from concept to company, or developing a minimum viable product, is daunting enough, but seeking an initial fundraising round brings a complexity that can be especially challenging to manage.

So how do robotics startups best approach fundraising and secure the financing to propel their company to the next level? There are five key areas to keep in mind about fundraising for robotics startups that founders must learn and practice.

Understand the proper fit between your company's scale and the fund's scale

Too often, founders court venture capitalists without understanding that the company they are founding might not be the right fit for VCs. Venture capital firms generally, and ones that invest in robotics specifically, look to invest in startups that have clearly identified potential to scale exponentially.

They are not geared toward backing entrepreneurs looking for an exit under $100 million that will only realize a handful of multiples for the investor. VCs are more likely looking to fund on a much larger scale - think a $1-billion-plus exit valuation - and back a company with the potential to deliver at least a 10x return.

Venture capital firms generally, and ones that invest in robotics specifically, look to invest in startups that have clearly identified potential to scale exponentially.

Usually, robotics companies are capital-intensive and require a robust revenue model compared to pure software startups, and this is not for every VC. In fact, venture capital is likened to rocket fuel" that is dangerous if put into a car but perfect for a rocket ready to shoot for escape velocity. Smaller-scale ventures often do not interest VCs but might be perfect for angel investors.

Bottom line: Do your homework, manage expectations, and seek funding from investors working at a scale commensurate with your idea and comfortable with the unique needs of robotics companies.

Consider capital sources that fit different companies and startups at different stages of its growth

Now is a great time for starting a company, in part because there have never been more sources of financing available. Angel investors and venture capitalists are just a portion of what is available.

There is growing opportunity, especially for robotics and AI startups, in nondilutive capital, including from U.S. government sources such as Department of Energy and Department of Defense grants. There are loaded/nondilutive funding streams, such as convertible debt, available from financial institutions and angels.

Special purpose acquisition companies, or SPACs, especially for hardware and robotics companies, have become popular in recent years. Some of these might be a better fit for your company at the current (or future) stage of your organizational growth cycle.

But some sophistication is warranted. Ask yourself what constraints or potential downsides come with the specific funding model you are considering/pursuing. Government grants, for instance, might drive the pace of development or push you toward certain customer-facing directions in ways that could be ill-suited to your company.