June 29, 2015      

Equity markets aren’t blind to the potential profit in robotics, but their vision is obscured by two concerns as old as the industry itself.

The first is the industry’s history of over-promising — although robotics executives would say unrealistic expectations are more to blame. Either way, it has been hard to meet fictional depictions of robotics as thrilling, human-like machines.

This issue is fading because robotics is starting to match people’s expectations.

The second concern is more substantive: Investors generally ignore hardware-centric plays. Hardware requires more upfront investment, is slower to develop, and is faster to become a commodity when compared with software and services such as social media. Decades can lapse between identifying a promising concept and the commercialization of a robot.

And, ultimately, hardware offers a smaller return on investment than software does. It is hard (though not impossible) to imagine hardware automation causing the same excitement that comes with a popular mobile app.

Yet as prices fall, the installed base of robotics continues to grow, said Sonia Francisco, a senior research analyst at Frost & Sullivan. Francisco noted industry figures showing that the number of industrial robots deployed in 2014 was up 15 percent over 2013. There will be 1.65 million industrial robots working around the globe next year, she said.

Acquisitions and private placements continue to be much more common than equity public offerings.

Smaller robotics firms join the ‘Big Four’ with IPOs

Of course, there have been successful initial public offerings among robotics companies.

The Big Four robotics firms — ABB Ltd., Fanuc Corp., Yaskawa Motoman and KUKA AG — are publicly held, but they represent the old guard. By and large, they sell into traditional, large-scale manufacturing environments.

Among the few smaller, nimble automation companies to have gone public are Adept Technology Inc. and iRobot Corp. Both address advanced manufacturing scenarios with systems that are flexible, sophisticated, and compact.

Industrial robotics are increasing in number and value.

Pleasanton, Calif.-based Adept makes systems dexterous enough to handle small food items, and it sells a mobile robot for production lines and offices. Bedford, Mass.-based iRobot‘s signature products are home vacuuming and mopping devices.

It’s no coincidence that both Adept and iRobot live or die as much by the robustness of their software as their hardware. Until they are comfortable with a new idea, most investors will gravitate to the familiar, and in technology, that means software.

Medical systems are attractive to some investors today. In May, Corindus Inc. raised $42 million in an IPO.

Four companies, each working on human-assist systems, went public in 2014. All of them, ReWalk Robotics Ltd., Ekso Bionics, Titan Medical, and Cyberdyne Inc. make different mixes of medical and nonmedical devices, including exoskeletons. Only two of the firms are American; Titan is a Canadian firm, and Cyberdyne is Japanese.

Looking to the near future, software-only plays that are hardware-agnostic will generate interest. For investors, the industry cannot move away from proprietary products fast enough. The same is true for integration software — and for the same reason. Interoperability remade the desktop-computing world, and it will have a similar effect on robotics.

Francisco also pointed to communications developments as another enticement for public markets. The coming Internet of Things, in which tools and machines become nodes on the Internet, will have a major effect on robotics. While most systems today simply assemble components in isolation, new systems are starting to communicate among themselves and soon will begin linking to strategic enterprise applications.

All this talk of equity investing, however, assumes that robotics entrepreneurs as a group aspire to IPOs, which they don’t. By far, though, the majority of robotics firms have either said they do not want to sell shares to the public or have simply refused to discuss it.

More so than in other startup segments, robotics entrepreneurs will not stomach the interference and pressure to meet higher and higher quarterly numbers that follow an IPO.

Public investor headaches

IRobot has become a case study on how public shares can cause significant headaches. In April, an activist hedge fund took a 5.1 percent stake in the company. Red Mountain Capital Partners is leaning on iRobot executives to quit their military and office product lines in favor of its home-cleaning devices.

Many in robotics see high-profile Rethink Robotics Inc. as primed for a public offering, but like so many of its cohorts, it studiously avoids the topic. Rethink makes iconic and easier-to-program machines, including the dual-armed Baxter. The devices are designed to work safely with workers in smaller manufacturing venues, two key attributes for advanced manufacturing.

What’s interesting is that Rethink’s most recent round of venture capital funding included investment bank Goldman Sachs Group Inc. Goldman executives like to invest in companies they think should go public.

Then there is Universal Robots, whose product line resembles that of Rethink in significant ways. Its UR robots have just one arm, and both companies are addressing the need for industrial robots that are small, less expensive, safer and flexible compared to their conventional predecessors.

Universal might have made a good IPO candidate, but its executives instead opted to be acquired by Teradyne Inc.

It is only a matter of time before public markets catch the scent of robotics. Owners can hold off, but, along with greater capabilities, that reticence will only increase values. Sooner or later, this sector will succumb to Wall Street’s affections.