August 23rd, 2013

Robots: Venture Capital in Robotics - Transcript

Diana Saraceni is a Venture Capitalist at 360 Capital Partners. In this interview, she tells us about her first investment in robotics 3 years ago with Invendo Medical, and her views on how the market has changed since then. Hardware is now perceived as less risky, even though it is more challenging to scale than software. Recent success stories have further helped promote VC funding in robotics.

Saraceni discusses the importance of the founding team, as well as their advisors, for the success of a company. Finally, she shares her view on open source vs. proprietary technology from a venture capitalist’s perspective.

Diana Saraceni
Diana Saraceni is a partner at 360 Capital Partners, a Pan-European Venture Capital firm. Before becoming a Venture Capitalist in 2001, she was Senior Advisor at Lazard Investment Banking. At Lazard she was part of the Technology Team and primarily worked on M&A transactions and IPOs. Prior to Lazard, Saraceni spent several years as strategic consultant with A.T.Kearney in Milan and London. She was/is part of several national and international start-up selection committees and holds a degree in Engineering from the University of Rome and an MBA from LUISS.


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ROBOTS (Per): You have mechanical engineering background, but you spent a lot of time in finance, and then you came to robotics. When was your first investment in robotics? When did you start to think that robotics might be an area to invest in?

Diana Saraceni: To be frank, the first investment was three years ago, and I did not realize it was about robotics. It’s a German company named Invendo, and it’s a medical device company before being a robotic company. I’ve been active in medical device [investing] for the past six or seven years, and so for me it was above all a medical device investment. Then during the course of due diligence, all the typical concerns that are raised when you look at a robotic business raised an eye, and [the company] was better identified as robotic business because of the technical team being around. That was my first investment and that’s a space I’m still very actively looking at: robotic medical devices.

ROBOTS: What is the area of application? Surgical? Rehabilitative? Diagnostic?

Diana Saraceni: Above all it has a diagnostic application. It’s [used] within endoscopy – to be specific, colonoscopy – and it helps with prevention as well intervention for colon cancer. It’s a single-use colonoscope that gastroenterologists would use to [conduct] a colonoscopy for their patients – for diagnostic purposes above all – that allows in almost all cases for the patient not to be sedated. Because of the propelling factor that the colonoscope has, it is very secure for the patient as it avoids perforation, and being a single use, it avoids all risk of cross infection. Colonoscopy is a very big market – it’s a huge market of some billion dollars – and so with a long-term vision of replacing existing [colonoscopy] devices, I saw this as extremely exciting for an investor.

ROBOTS: What were your feelings when you first discovered that you had made a robotics investment?

Diana Saraceni: Initially I was scared because of the fact that the device proved to be extremely complicated in its design and manufacturing, much more than it [seems] when you look at our slides of course! But then on reflection I could see that because of that, it was much more defendable and protectable in the long term because it is difficult to replicate. There’s a lot of knowhow on top of the existing patents to protect the copyright of the invention.

ROBOTS: This is a trait that is shared among many robotics inventions and companies … that they look simple on the outside but they’re not simple on the inside … Do you think that your background as a mechanical engineer helped you alleviate your fears?

Diana Saraceni: Of course it gave me comfort to see it from a mechanical perspective [even though this] is probably not the most relevant to the product, but it was comforting to start looking at the product itself: the device. I have never practiced as an engineer, and I started doing financial investment in the very early days of my career, so it was probably more of a psychological [comfort] rather than a lot of expertise that brought [me to take on] the deal.

ROBOTS: This deep background must make you unique in the investment field. You have both lots of experience in investing, and you’re actually trained as a mechanical engineer. This is really optimal …

Diana Saraceni: It’s not so peculiar in my industry: there are several venture capitalists that have a general engineering background, be it mechanical, electronic etc. If I was an entrepreneur wishing to start a company and raise money, I would certainly look into the background of the person I’m talking to because the level of confidence will be different depending on the type of experience they have – not only their career experience, but even more relevantly, their professional experience.

ROBOTS: You did all this three years ago, and I understand you are of the point of the view that the investment opportunity in robotics has changed drastically since then. Whereas your first robotics investment was a happy accident, now you’re actually making a concerted effort to invest in robotics. What what has changed?

Diana Saraceni: The way the venture capitalists were thinking four or five years ago was that robotics was a scary place to be because it was about hardware, and hardware has a lot of risk associated with it. Venture capitalists are choosing among several different industries … digital, software, hardware … and in the past hardware has always been penalized by the fact that there’s a lot of associated risk because [it] needs to be manufactured, there could be quality issues and, in the investor’s mind, it can require a lot of effort and capital.

On top of that, the belief until four or five years ago was that everything associated with robotics in the end was system integration, so not that easy to defend in the long-term, not that easy to scale, and not that protectable. And that was the key thing: the protection of the business.

I think we became braver because we came to understand that patents [usually] work pretty well even in that space. In addition, there’s a lot of knowhow that is proprietary to the company and that is able to defend the business. These give the sector a much higher chance [for success] today than some time ago, and the success stories help of course. We have seen a few robotics companies in the market recently (like Intuitive Surgical) that in a relatively short time frame have grown to become billion dollar companies. They are the role models for the business, and prove to us investors that it is possible, and it works.

ROBOTS: You’re actually looking for projects now. Can you tell me about the projects you have found? What have you invested in recently?

Diana Saraceni: I have looked at several businesses. Some are too early in their R&D phase, so I’m monitoring and waiting for the day these will become spin-offs. Some are projects that I perceived as having high potential, but the teams to explain to me how and when, and what the application will be exactly, are not there yet, so I’m waiting for that. Most of them are in the medical space, partly because that’s one sector where I’ve been actively investing because of my background.

I’ve looked at consumer robotics, and I’ve looked at industrial robotics. This looks exciting, but I’m not that comfortable with the final application, and particularly my concern in that sector is the price [because] you never really know upfront if the end-price of the device will change the size of the addressable market significantly. That’s a big concern for an investor because if the price of the device can change by an order of magnitude, the size of the market [can also change].

ROBOTS: You talked about these teams that you’re now following and monitoring that are emerging from research and becoming more investable. What should a team do to further this along? What do you see are the weak points that they need to strengthen?

Diana Saraceni: Something that I give as a recommendation to all sectors and isn’t any different in robotics is: qualify the project. Before raising money, the project needs to be qualified. What I mean by qualify is that the founding team (in this sector, usually a group of technicians) should look for people who believe in their business, people who are of a certain standing, who have been active in that space before, have proven to be successful, and who are happy to attach their name to the project because they understand it, they like it and they think there’s a lot of potential. They can advise the founding team on the route to undertake.

These people can complement the team in those areas where they not [experienced]. It can be easily arranged because it’s about sharing the equity in the end. It’s about giving some sweet equity to people that are happy to provide advice in exchange and work as a brand name in the end for the project. [Qualifying can make] a strong difference to the project, but the founding team does not always perceive its value when it’s a technical team.

ROBOTS: Getting a good mentor or a good senior partner is a critical thing?

Diana Saraceni: Yes, and there should be more than one. There should be two or three around the table, each one with their area of competence. That’s the first critical step. If they understand the business, if they’ve been in the business for a long time, they would [be able to] give guidance on what is the best application, where to start from, what are the first milestones the team and the company should target, and all this [advice] would probably be of a higher quality than if a management team was working by itself.

ROBOTS: If you have a number of projects available to invest in, how do you see the difference between the near hits and the real hits? The obvious analogy here of course is AltaVista and Google. AltaVista had the support of DEC – a huge company – and they did some breakthrough innovation, but they didn’t quite get it right. Then we have the Google guys coming out of academia, writing fantastic papers, but they might not have been very accessible to investors even though they were the right guys to invest in. Do you find it a challenge to see the difference between these? How do you do it?

Diana Saraceni: It all goes down to the founding team: the power, the energy, the commitment, the creativity, and their background … and, again, by founding team I’m not only referring to the founding operations people, but all those people who are associated with, who mentor and want to help the company. That is the real difference.

ROBOTS: The robotics industry started after Open Source was a big success in many other areas, and in contrast to software, it was basically open to a certain degree from its birth. Am I correct to think that inventors are not terribly fond of the Open Source model? How can an Open Source project compete with a proprietary solution? Because we’ve seen that after five, ten or fifteen years, open eco-systems are usually much bigger than closed ecosystems are…

Diana Saraceni: The scary thing in the Open Source world for the investor is the fact that you share in the competitive advantage with the rest of the crowd, and eventually your competitor. It all goes back to the idea that competitive advantage is partially granted by secrets, by patents and by things you want to develop and keep for yourself.

There are businesses that are working in complete Open Source mode, but they had to prove somewhere else how they would be able to scale, grow, and defend the business, and be a nice target for potential acquisition – because that’s the end game for us, even without being in a proprietary and conservative space.

If you can do that, and if you can prove that you will be able scale, be very profitable, and keep a high profit margin in the long run because of other factors that are part of your business model, that’s fine, that can work. But that’s the limitation: you have to prove somewhere else that you can scale and defend your business the same way you would if you were in a closed environment.

ROBOTS: Is this also relevant if the companies are partly Open Source and partly closed source?

Diana Saraceni: No, of course not. It’s very different if the closed part happens to be the core and what gives the company its competitive advantage.

ROBOTS: We’ve talked about how you follow research projects as time progresses. When should people pitch to you, and how should they keep you updated so as not to clog your inbox? How do they get on your radar and stay there in a positive way?

Diana Saraceni: They can get on my radar by sending me a short presentation; they don’t need to be introduced by someone else. I take cold calls all the time from people who want to hear my first reaction to something that’s still in the R&D phase; I’m happy to do it. I’m very open to [giving] feedback even when I have to say that I don’t believe there’s a market, or I don’t believe they will succeed … and, I explain the reasons.

I’m not the most popular person on the earth because of this, but I tend to be very open. That’s really my style and I hope it helps. Some people disappear because they don’t like what I say … they don’t think they’re supported. For those who are inclined to stay in touch, and still believe in the project but don’t necessarily agree with me, they say ‘Now we know what’s not convincing to her and we will come back with the proof that she’s not right.’ When they’re in the most advanced phase (sometimes one, two, three years from the first meeting), we meet up again and that’s when either they’re convincing or they’re not. Or sometimes they get funded by someone else, or I prove to be right.

It happened to me recently – five years after a first meeting I had had and I didn’t recall – I had a team come back and say, ‘We tried for five years and you were right.’ Not that I want to say that I’m always right – absolutely not – but this was interesting. It was one of those cases where my feedback could have saved a lot of time and resources.

ROBOTS: This straight feedback is absolutely the right way to go, and it’s amazing that you’re open to anybody pitching and keeping you up to date as the product moves along. That’s a service to the community. If somebody comes to you and you have critical comments, and if they then address those problems in a strong way, that’s really going to help build a relationship with you …

Diana Saraceni: It does, and it does also when they prove that I was wrong. Then they can say ‘We have been working hard, we understand your concerns as a representative of the investor community, we understand that we have to prove that there is not too much risk involved in that part of our business plan, and we’ve addressed this and proved there is no risk associated with it.’

ROBOTS: To a large part in a technical sense, that’s what research does. It discovers problems and it solves them. This just happens to be a funding problem …

Diana Saraceni: Yes, that’s it.

ROBOTS: Do you operate worldwide?

Diana Saraceni: We’re a pan-European firm. We operate all over Europe.

ROBOTS: This is for European business.

Diana Saraceni: Yes, for European business.

ROBOTS: You’re in the medical field?

Diana Saraceni: No, we’re generalists. Myself, I lead the med-tech investment for our fund, and clean-tech as well; but we’re named 360 Capital Partners, and 360 stands for the idea that we’re open to any industry. That makes us generalists as a fund, but each of the partners has a focus on some [particular] industry.

ROBOTS: So, what you’re saying is: it’s okay to approach you, to stay in touch with you and respond to your feedback over a period of three, four, five years until their product might be ready?

Diana Saraceni: Exactly.

ROBOTS: Is there anything else you’d like to say? You have a diverse group of listeners within the robotics field out there listening.

Diana Saraceni: We’re in a very interesting time for robotics, and for investment in robotics, so I would recommend carefully thinking about it and trying it. I wouldn’t have made the same recommendation a few years ago, but today with all the success stories, there’s a completely different perception. It’s the right time to try to spin off a commercially viable company out of an R&D project. You should just try it. It’s a good time.

ROBOTS: Thank you very much for taking the time to do an interview. We really appreciate that.

Diana Saraceni: Thank you. It was a pleasure.


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