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Role models for the mobile robot industry?




Entrepreneur by Bill Fox


Part 4


First posted Feb 2005

If this question leaves us feeling slightly mystified, that could be a good sign. In laissez faire free market theory, entrepreneurial excess returns (ie. "getting rich") are born of uncertainty.

Different Industries tend to go through different cycles. After a new wave of disruption ripples through an industry, whether caused by the diffusion of a new technology or some other factor, the industry will tend to settle down for a while. As it settles down, its operations become more predictable. With increased predictability, its average rate of return on capital tends to decline back towards an average overall market rate of return. This is one reason why stock market bull trends in all of the various broad S&P sectors tend to be followed by corrective bear trends, as they tend to regress back towards historical valuation metrics and rates of return.

The mobile robotics story is about the onset of highly disruptive and prolonged change in many areas of automation. Let us first consider how things looked prior to this “robolution."

In his article “Tomorrow’s Automation Leaders,” Jim Pinto explains that industrial automation has historically not been one market, but “a loose conglomeration of specialized applications and vertical market segments…the problem is the variety of applications. [As an example] there are millions of thermocouples used, but mostly specialized and related to specific industries and requirements…You won’t find a $1 billion thermocouple company –or even a sensor company that is quite approaching that size…There are a lot of systems integrators. They look like they are serving big markets and can grow. But it takes good systems talent to design and install a system, to develop the right cost and controls, to expand beyond a home territory without running out of talent or money.’

In the world described by Pinto, automation meant incremental refinements within the manufacturing portion of the macroeconomic value chain. By “macroeconomic value chain” we are talking about the process in which goods are transformed from a raw state to a refined state for end-users. Advanced automation usually meant developing more complex sub-systems that were parts of much bigger, more expensive, and more complex manufacturing systems.


Today, mobile robots are breaking out of the manufacturing realm and invading the full spectrum of the value chain. In Part Two I discussed such iRobot examples as MicroRig used at well sites in the oil and gas industry and the Roomba used in consumer households.

All of the various industries within this long chain have very different competitive dynamics. Therefore, no “one size fits all” business model will work for all mobile robot ventures. We need a broader viewpoint that takes into account the basics of entrepreneurial calculation, industry and competitive analysis,and the analysis of emerging industries and technological application.



The diagram above, provided by economist Sean Corrigan, depicts a macroeconomic “cone of production” or "value chain." The sample time scale in months at the bottom progresses from left to right, and varies in length depending on the goods involved. Raw materials are extracted by primary industries, undergo manufacture with capital goods, are assembled by intermediate industries, distributed by wholesalers, and then retailed to consumers. The way in which the chart fans out signifies how more firms tend to get involved as goods get closer to end users.

There is a natural tendency to read this chart from left to right. We tend to think that goods flow from their unfinished state to a finished state. When we work on something ourselves, we like to believe that our own labor improves it and is not wasted. Even the use of the term "value added" in our language reinforces this perception. However, if we confine ourselves solely to the left to right viewpoint, this can lead to an intellectual trap commonly referred to as the Marxist labor theory of value. It can encourage a faulty notion that robots exist to ruthlessly drive down labor costs while permanently putting people out of work, rather than create whole new products with superior price to cost characteristics that can actually create vastly more wealth for society and many more jobs for humans. More on this later.

From the standpoint of understanding the process of successful entrepreneurial calculation, the chart reads more from right to left than left to right. Right to left is the direction that free market demand flows. It is also the direction that price information gets transmitted. As an example, if a producer misjudges production requirements and floods the market with goods, prices will plummet regardless of the amount of labor or investment that went into his products. Therefore, simply adding up the amount of capital investment or the costs of work performed on goods as they flow from left to right is frequently worthless in terms of determining the ultimate value of goods. This is in an important point I will return to later when discussing ways to uncover cost-effective robot projects.

We need to keep in mind that not only are goods changing hands, but so is price information. This helps all the different factors of production adjust towards each other and maintain some form of balance, thereby increasing competent investment and reducing malinvestment (the arch-enemy in free enterprise economic theory). Hence, a free enterprise economy is both an informational system as well as a system that processes goods. Another important point I will return to later in this paper.


When we say that we want to make honest money in robotics, what we really mean is that we want to put together an enterprise that has a sustainable advantage that allows it to deliver excess returns (ie. generate superior earnings and create wealth). The chapter “The Structural Analysis of Industries” in Dr. Michael Porter’s classic book “Competitive Strategy.” provides a model to help us identify the strategic elements we need to make favorable for our enterprise to maximize our sustainable advantage.



Possible New Firms in industry





Competition Within an Industry

Among Existing Firms




Possible Product Substitutions


The diagram above is similar in concept to Figure 1-1, page 5, from Dr. Michael E. Porter's Competitive Advantage, also page 4, of his Competitive Strategy)


To illustrate this diagram, I will draw upon information already provided in Part Two of this series about iRobot's My Real Baby Doll. We can also draw upon information contained in Dr. Rodney Brook's book Flesh and Machines: How Robots Will Change Us. I provide this information taken from a few sources to help illustrate Dr. Porter's concept and not to offer a definitive study of My Real Baby Doll.

In the beginning...The rational entrepreneurial typically looks at dozens, if not hundreds of market opportunities for the "value proposition" that he has to offer with a new product. The "value proposition" really means the quality that his product offers relative its price. (cf. again the "value war" concept mentioned in Part One).










Size of Facility

[source: INtelliBot]

The robot value proposition can be tricky to explain to potential customers because it typically involves a greater long term gain to offset higher short term costs. The robot's value proposition may increase relative to humans as the amount of work increases, as noted in the diagram above to explain INtelliBot's ES-700 floor-cleaning robot.

To find a worthy project, the entrepreneur compares his potential revenue opportunities with his likely costs required to produce that revenue. His cost estimates are based on his likely structure of production. He typically selects the project(s) with the highest risk-adjusted rates of return.

We need to bear in mind that the end-users who drive market prices usually are not worried about the entrepreneur's costs, margins, or about whether or not he is using robots. It is up to the entrepreneur to care very deeply about estimating his revenues and his costs as accurately as possible. If he misjudges either or both, that is, if he engages in malinvestment, he may go out of business and be forced to rejoin the ranks of wage earners.

In a free market system, the ultimate "tyrant" is the consumer. As an aside (and as a response to Leftist visions of robotics that I discuss in Part Five of this series), it may be worth reminding the reader that the main de facto historical alternative to this tyrant has been the tyranny of interventionist or socialist government. The latter tend over time to accumulate detrimental special privileges, inflate bureaucracy, undermine entrepreneurial incentives, raise taxes, distort vital market feedback mechanisms, reward malinvestment, and otherwise become even worse tyrants than the consumer. In contrast the free market tends to reward competent investment and punish malinvestment. Yes, the consumer is often a tyrant, but he is usually the least bad tyrant known to any political or economic system.

Analyzing buyer power: This is a good starting point for Dr. Porter's chart. In the case of My Real Baby, the buyers consist of parents who make their purchase decisions on their own or at the urging of their daughters. Their power is very diffuse, so there is little danger that they are going to form a cartel to force prices down.

However, if we back up a step in the cone of production and look at channels of distribution, a different picture emerges. A big question is how heavily My Real Baby has to rely on TV ads as opposed to word of mouth or alternative media such as articles in magazines and newspapers. According to Dr. Brooks, the conventional wisdom in the toy business is that one can only get one new idea across in a thirty second TV commercial for dolls. My Real Baby had dozens of new robotic features to differentiate itself, but conveying enough of them over TV to influence prospective buyers was a challenge. The costs of TV ads presented a problem for iRobot, which was short on cash. Another important question was the extent to which established doll companies such as Hasbro have special advantages in their relationships with retailers and other channels of distribution compared to a new industry entrant such as iRobot.

Analyzing Substitutes: In his talk at the March 2004 robot conference, iRobot's CEO Colin Angle said that "smart dolls" are priced at the high end of the market, where prices typically range from $80 to $120. According to the Forbes article "Machine Dreams," the smart toy market comprised 2% of the $25 billion toy market in 2001.

We might ask how the toy market in general is segmented, and how "smart toys" are differentiated in terms of price and performance. How much extra behavioral sophistication is required in a smart toy to motivate a child to beg her parents to buy one, and what is the maximum price difference compared to non-robot dolls that parents will tolerate?

Analyzing supplier power: When Dr. Rodney Brooks and Colin Angle first surveyed electronic component costs, their estimates came in too high to justify the project. The rule of thumb in the doll industry is that the cost of parts should come in at 6% of the sales price. (Brooks, p. 110). To drive their costs way down, they decided to manufacture and assemble the doll in China. They used super cheap computer chips with only a few hundred bytes of RAM. They also reduced from five down to one the number of motors that drove the baby’s face. Lastly, they developed sensors that cost only a penny apiece.

Electronics parts suppliers comprise a very competitive and diffuse group, so there was no danger that they would form a cartel and hike prices if My Real Baby became a big hit. However, it would be a good idea to look beyond them and analyze everyone else in the value chain who has a "cut" on the doll to consider who might try to squeeze them later on.

Analyzing industry competitors: The doll industry itself is very competitive. An iRobot invasion of this industry, or for that matter any other industry, constitutes a kind of R&D arbitrage. In essence, iRobot was gambling that it can create such a strong "value proposition" through its ability to "robotize" products that this will offset its weaknesses as a newcomer in other areas.

In order for iRobot to sustain its competitive advantage in the doll industry, the R&D departments of competing companies have to remain asleep at the wheel. It turned out that within a year after the debut of My Real Baby, all the major toy companies decided that robot toys could become big sellers and began to engage in competitive retaliation with their own products.

Analyzing the threat of new entrants: It is impossible to predict who will roil the toy market next with a catchy concept that can be executed at very low cost. An example of an important offbeat “smart toy” concept that preceded both My Real Baby and Furby in the mid 1990’s, was a small cheap toy with a few buttons and an LCD screen called a Tamagotchi. The Tamagotchi buyer paid about $16 for a game in which he or she was required to care for a virtual reality pet portrayed on the LCD screen. Tamagotchis sold by the millions. Who could have predicted this?

In many respects both Furby and My Real Baby were “me to” entrants after the Tamagotchi. Furby took the situated Tamagotchi virtual reality smart toy concept to the next level by creating an embodied robot. "Situated" in robot jargon means the device can interact like a computer game but has no body. "Embodied" means it has a physical being such as arms or a head with sensors on them that physically respond to the environment. My Real Baby boosted Furby's embodied concept to a new level of interactive behavioral sophistication. As an example, My Real Baby stops crying when you put a baby bottle to its lips. A sensor in the baby bottle tip activates a senor in My Real Baby's mouth.


This cursory overview of iRobot’s foray into the toy business helps to explain why Colin Angle remarked during his luncheon talk at the March 2004 robot conference that he felt the toy business is generally too risky to merit sustained initiatives by his company.

To the extent that Mr. Angle wants to be a generalist and build many different types robots for different industries, he is probably wise. The doll design industry probably has a lot in common with being a fashion designer, Hollywood script writer, or musician. So much is subject to public whim that one usually needs to have a certain passion for the art form to want to stay completely focused on this business area. Rather than bet his company on a blockbuster doll, Mr. Angle probably made a wise decision by selling My Real Baby to Hasbro for $1 million plus a 5% royalty once Hasbro achieved break-even.

The other side of the coin is that if iRobot wants to become a generalist robot builder, then the company may need to decide how to position itself as a diversified company. .iRobot has already diversified itself into the consumer products industry through its Roomba vacuum cleaner and into the defense industry with its PackBot robo-tank.


What is implied by becoming a diversified robot company that builds robots for different markets?

On one end of the spectrum of the diversified business model is the merchant builder approach. Here, a robot company would focus on building robots for other companies for contract fees. It would refrain from taking equity positions in robot ventures. Theoretically it could achieve a fairly steady income from a wide pool of clients by building up a large backlog of contracts. It would avoid the risks that go with launching ventures in competitive industries. Conversely, it might also suffer major opportunity costs by not participating in major growth opportunities.

Towards the other of the spectrum are strategies involving equity exposure to get more upside.

The most decentralized equity participation approach involves using joint ventures or spin off companies formed around particular robot product lines. Spin-off companies typically provide more entrepreneurial incentives for their managers, are more flexible and innovative, and are closer their markets than subsidiaries of large companies. Although the parent company retains a major stock position, it usually exercises a low level of control.

Lean and mean,decentralized, transparent, focused, hands-on, market-responsive, no-frills companies are consistently extolled in various investment classics such as The Warren Buffet Way by Robert Hagstrom and Beating the Street by Peter Lynch. They also resonate with that whole genre of management guru literature that began with the blockbuster In Search of Excellence by Waterman and Peters over a couple of decades ago.

In the middle of the equity participation spectrum is the diversified technology company. It has medium decentralization, and is subject to medium control by top management. A classic example was the old Hewlett Packard under its deceased founders William Hewlett and David Packard. HP organized major product lines into separate divisions that were kept wholly owned. The company tried to combine elements of both decentralization and centralization into its corporate structure. More on this later in this paper.

At the far end of the diversified company matrix we have the imperial conglomerate. The poster boy image in my mind is the old "Gulf + Western" conglomerate under former commodities trader Charlie Bluhdorn in the 1960's and 70's. G + W originally owned an auto parts company and a sugar operation and later squeezed Paramount Pictures for the liquidation value of its real estate assets. One senses that G + W was parodied by Mel Brooks in his comedy Silent Movie as "Engulf + Devour" with its literally foaming-at-the-mouth CEO and plaques that read, "Our bathrooms are nicer than most people's homes." G+W's financial operations were so aggressive that Wall Street never really trusted the company and usually awarded it a relatively low P/E multiple. G+W later changed its name to Paramount Communications, which was later acquired by Viacom.

I want to dwell on this kind of company for several more paragraphs because of it's powerful leadership influence in the American economy today. It provides an interesting contrast to my discussion of the old Hewlett Packard and Cisco Systems as possible robot company role models later on.

The imperial conglomerate has wholly owned subsidiaries in unrelated industries. In theory, the conglomerate can use cash generated by operations in some areas to diversify into other areas that might provide counter cyclical market risk reduction. One example is General Electric, which has heavily diversified out of anything to do with its roots in electronics and widgets and into unrelated industries such as financial services and broadcasting.

iRobot is already beginning to go down this path to the extent that earnings from its defense contracts help to pay for its consumer products operations. There is nothing wrong with this, to the extent that the U.S. Government has real needs, is the largest de facto venture capitalist in America, and in the absence of significant US corporate investment in robotics the government has been a major source of funding to help robot companies stay alive. However, there are big potential dangers downstream, as this paper will continue to make clear.

As part of its cash redeployment schemes, General Electric has raided its own retained earnings and heavily leveraged itself. Financial writer Adam Barth observed in 2002: "For every dollar invested in GE stock at the present time, the shareholder has a paltry $.08 in Net Tangible Assets and a whopping $1.47 in liabilities." He added that this is not only a GE problem but also an issue for the thirty "All American" companies that make up the Dow. ".The Dow's net tangible assets are presently leveraged at a 6/1 ratio -a capital structure bearing far greater resemblance to a hedge fund than a prudently financed corporation."

In other words, a great many of America's largest companies are de facto hedge funds. Their "diversification" (Peter Lynch preferred the term "di-worse-ification") resembles that of imperial conglomerates. This is not exactly good news for a country with out of control debt growth and intractable balance of trade deficits linked to declining product competitiveness.

Although the big conglomerate may appear decentralized to outsiders because of its involvement in many unrelated industries, in reality it usually operates as a highly centralized, highly controlled imperial order. Top management robs the cash flow of vassals in one area to pay themselves or hegemons in other areas. Quite often the self-anointed corporate aristocracy does not know enough about any particular area to do anything really innovative, visionary, or responsive towards a particular market, and instead contents itself with financial reengineering activities that include asset-juggling operations, accounting sleight-of-hand, and engaging in nonproductive mergers and acquisitions (I discuss their track record later), all of which increase the odds of malinvestment throughout the economy. Last, but not least, high-greed top management teams typically award themselves outlandish salaries, stock options, and golden parachutes. Dr. Paul Craig Roberts wrote on this topic, "According to William McDonough, chairman of the Accounting Oversight Board, in the bad old days of President Reagan’s “trickle-down economics,” the average Fortune 500 CEO made 40 times more than the average person who worked for him . . .By 2000, it was between 400 and 500 times, and last year I believe it was about 530 times.”

The size, prestige, and complexity created by cobbling many firms together into a large conglomerate often provides enough maneuvering room to subtly and cleverly plunder shareholders while real underlying wealth-creating performance actually declines (and malinvestment rises). As part of their sorcerer's bag of tricks, imperial conglomerators typically have enough cash flow to pay for big ad budgets, big consulting fees, major lobbyist services, and big transaction costs. All of this helps to bribe elements of the media, academia, the consulting profession, Washington, and Wall Street into saying nice things about them.

It is not uncommon to see America's high tech companies travel the left hand spiritual path of the imperial conglomerate. If a majority of Fortune 500 CEO's are cutting corners and raking it in, we should not be surprised to see lots of little guys out in the heartland get tempted to go in the same direction. As soon as they have enough product line successes to get some good "story" into their stock and run it up, they team up with Wall Street firms to use their stock as currency and go on acquisition binges to cobble together companies as quickly as possible. They usually wind up with mediocre products, lousy accounting standards, a weak corporate culture, and poor quality of earnings --and you guessed it -- greater malinvestment. Even though the insiders may get very rich, they obviously are not reinvesting back into people around them the way others have invested in them, so there is usually some extreme selfishness, hypocrisy, and a major lack of foresight and delayed gratification going on here, if not outright fraudulent or covertly hostile exploitation of other people. This really gets down to some very basic human decency issues regardless of one's ideological persuasion, be it socialist, liberal, conservative, anarcho-libertarian or whatever.


We can normally conduct a mature industry analysis by covering in detail all the elements addressed in a Red Herring (prospectus) or a Form 10K. These elements include the financial strength of the company, the quality of its management, the quality of its products, and other elements of standard fundamental analysis. I would also point the reader's attention to insights spread throughout Dr. Porter's books that I have already mentioned.

The discussion I just provided regarding My Real Baby Doll came from a mature industry perspective. In the case of My Real Baby, this is probably appropriate. iRobot introduced its robot toy concept as a "feeler." It apparently did not have the funding or corporate structure in place to keep iRobot focused on the the My Real Baby product line with constant upgrades.

The obvious technology-related question regarding My Real Baby doll is how well it can "scale." That is, how well incremental levels of technology investment will relate to increased revenues. This is the kind of question that IBM had down to a science with its very profitable successive mainframe generations in the 1960's and 1970's. As another example, the Intel corporation turned its succeeding generations of microprocessors into a money machine in the 1990's, as did Microsoft with its generations of Windows.

My guess is that with iRobot's current level of technology and cost constraints, the My Real Baby Doll product line was unlikely to scale well. Interestingly enough, Dr. Brooks talked about coming out with a different product concept altogether, namely a new walking dinosaur, within a couple of years after My Real Baby (Brooks, p. 133). Later, Hasbro discontinued production of the doll.

Trying to make a living by producing serial toy “hits” puts us back in the fashion design firm mode reminiscent of Hollywood script writers, musicians, and other artistic entrepreneurs. In this kind of business, success has a lot to do with having the "gut" to anticipate fickle public tastes. It has much less to do with the robotic engineering competencies over which iRobot has much more control.


Mobile robotics is emerging as an insurgent technology through its ability to redefine products and work concepts. If we only use the perspective of the mature industry competitive analysis, we will probably miss an important"robolution" dimension.

Ultimately it is probably not all of one type of analysis vs another, but rather we need to simultaneously perform both a mature industry and an emerging industry analysis and then reconcile the two together.

Robotics may comprise an insurgent technology. It remains so easy to underestimate. I believe that we can apply a number of characteristics identified by Professor Clayton Christensen in his landmark book Innovator's Dilemma: When New Technologies Cause Great Firms to Fail.

Currently, mobile robots still tend to be complicated, clunky, and expensive. They are still not particularly desired by major clients of America's major tech firms. Robot producer margins are still low. Robot production costs still have not come down enough to price for a mass market (with a few exceptions such as the Roomba, Furby, and My Real Baby). In terms of the corporate culture of robot companies, they tend to require a generalists' mind set that harmonizes mechanical engineering with computers. This is a different focus than that of most leading high tech firms today. Current mobile robot market applications are still too small to satisfy the growth needs of major companies. Lastly, their "killer apps" of the future can not be analyzed because their markets do not exist yet.

Emerging Industries Characteristics

Emerging industries differ from mature industries in some significant ways. I will outline a number of the differences that are also covered in Dr. Michael Porter's book Competitive Strategy.

For starters, the promise of new opportunities often attracts more companies than mature industries. Historically, more new companies exist during the emerging industry phase than during any other time in the industry maturity cycle. During later phases there is typically an industry shake out and a consolidation process. In the beginning, however, it is usually not clear who the dominant players will be.

The fact that an industry is emerging implies that its products are new and that industry standards have not been set yet. A big part of the sales job of emerging industry companies is to convince people to become early adopters, that is, buy a product that they have not experienced before.

In an environment usually characterized by rapid technological change, quite often companies are under enormous time pressure to come up with new products and overcome bottlenecks. They lack sales data and experience running channels of distribution. In this kind of fluid, pioneering environment, management is often forced to be highly opportunistic and expedient.

Lastly, companies typically have high up front cash needs in order to begin production of their products. Once they get into production, they typically begin to experience a steep cost decline curve. If they can get over the production hump before competitors, they can make profits first, and then drop prices to create barriers to entry for the "me to" companies. . A classic example is the way in which Intel was able to steadily reduce prices after each new generation of microprocessors in the 1990's, leaving its competitor AMD perpetually struggling in its wake.


Emerging industry companies tend to put a premium on obtaining a first mover advantage and maintaining technological leadership.

There are many advantages to becoming a "first mover." The first mover of a unique product has no direct competition, although there may be indirect substitutes. First time buyers of this unique product become habituated towards its use. It is much easier to retain their loyalty than to win someone over who has first been broken in on someone else's comparable product. First movers stand a better chance of defining the new standards of the industry, which saves them the trouble of having to adapt to someone else's standards. Lastly, as already mentioned, the first mover is able to get his profits first and drop his prices ahead of competitors.

Maintaining technological leadership is also very critical. It positions a firm to retain a first mover advantage with follow on generations of products. It also gives a firm prestige that helps attract the best talent, therefore augmenting its technological leadership and creating a virtuous circle.

Companies that lose their technological leadership usually find it much harder to get it back than to keep it in the first place. Often second place in a rapidly changing technology environment means the road to continual decline.

From my own Wall Street experience, the concept of a sustained "value rally" in a busted junior technology growth stock is frequently a joke. Even among the big players, Forbes publisher Rich Karlgaard pointed out in one of his columns that approximately 80% of the major high tech companies that are dominant in one decade fail to remain dominate the following decade. The comebacks made by Apple and IBM in the late 1990's are rare.


Its the technology, stupid! Not surprisingly, emerging industry analysis tends to focus on "Everything You Wanted To Know, But Where Afraid To Ask" about all the technologies involved in the emerging industry itself.

The list of tech questions one should not be afraid to ask are almost endless. Here are some samples: How can we utilize technology to create new products that offer a whole new level of usefulness at reduced costs? Where is the technology in our field headed? Can it create a new approach to conceptualizing how we go about satisfying certain needs or performing certain tasks? What are the supporting technologies throughout the value chain? Who has the best resources for creating and implementing new technologies? How can one define an area of core competence in developing a new technology and sustain a competitive advantage? How well does the technology we are interested in "scale," that is, what is the amount of investment required to bring in incremental revenues?

Technological synergy. Developing "synergy" is very important to economize on limited resources. No matter how brilliant the R&D folks are within a particular company, they only have so much time to stay abreast of all the latest developments within a certain area of technology. One can only afford to hire a limited number of R&D staff members and supply them with finite resources. Therefore, it makes sense to keep ones product lines with the core competence areas of your R&D staff.

Patent barriers to entry. The size and quality of an intellectual property estate can have both a cause and an effect relationship with technological leadership. Its existence may signify substantial innovative competence. It may also signify barriers to entry and sources of royalty income that support further development. (cf. The June 24, 2002 Forbes article by David Raymond, “How to Find True Value In Companies.” which discusses how forward citations can be an important underlying indicator of the IP strength of a tech company).

Overcoming financial barriers. These barriers can be extremely formidable. Carnegie Mellon Tepper School of Business associate professor L. Frank Demmler provided some important insights in his talk: “Raising Money for New and Emerging Companies” He discussed five phases of a new development project, namely the idea, feasibility, verification, demonstration, and commercialization stages, and the obstacles involved with each stage:

Time to Pass Through the Embryonic Stage

Many first-timers underestimate the time it takes to build a business from the idea phase to the point where success or failure in the commercialization phase is clear. A study of 120 ventures showed an average time of 8 years to reach positive cash flow and evolve from the idea phase to the commercialization phase. [While I vaguely remember that there was such a study, I have no recollection of its source.] Others estimate the average time to profitability from 6-14 years.

Of course, there are exceptions to this average, and the exceptions are often the most publicized. Buying a franchise can have great appeal because it greatly reduces the time to commercialization by eliminating the idea and feasibility phases and shortening verification and demonstration phases. Someone else has already done the pioneering work.

The time needed by an individual firm to pass through the embryonic phase is an important factor that influences the amount and kind of money that a firm can seek.

Cash Needs Increase for Each Phase

The cash needs of a venture increase with each phase. The stakes go up to play in the next phase, and the costs of failure or exiting from a phase also increase.

One rule of thumb is that the cash needs for each phase increase by a factor of 5 to 10. By far, the most expensive step in the process is the commercialization phase.
For example:

  • $1 is needed to establish an idea;
  • $10 is needed to prove that it is feasible;
  • $100 is needed to verify that it works in the field and that it really fulfills customers’ needs;
  • $1,000 is needed to demonstrate that the product can be produced efficiently, that a marketing and selling formula is successful, and that the management team is effective;
  • $10,000 is needed to produce the product in full-scale volumes and to develop a national marketing and sales campaign and organization.


For companies that lack the cash to make it through various project phases, there are a number of alternative strategies they can consider:

Licensing: This allows a company to draw income from its technology without having to proceed to a next stage. The danger is that it puts ones technology directly into the hands of competitors, which may make it easier for them to reverse engineer ones trade secrets and eventually invent around ones proprietary advantages.

Join forces or make acquisitions: Mergers and joint ventures can be good ways to find the additional resources necessary to cover overall costs, albeit at the cost of the dilution of equity in the enterprise. Alternatively, it may cost a company less to acquire another company and its products than to develop counterparts in-house.

The downside is that overall, joint ventures and mergers and acquisitions have a poor track record. According to “When to Ally and When to Acquire” by Jeffrey Dyer and Prashant Kale, and Harbir Singh (July-Aug 2004, Harvard Business Review), “Most acquisitions and alliances fail. A few succeed, but acquisitions, on average, either destroy or don’t add shareholder value, and alliances typically create very little wealth for shareholders…Acquiring firms experience a wealth loss of 10% over five years after the merger completion, according to a study in the Journal of Finance. To add to CEO’s woes, research suggests that 40% to 55% of alliances break down prematurely and inflict financial damage on both partners. When we analyzed 1,592 alliances that 200 US companies had formed between 1993 and 1997, we too found that 48% ended in failure in less than 24 months…”

Subsidy: To set the stage for a new industry, someone usually has to help finance a gestation period where the return on investment on long term developmental initiatives is not clear. In Part One I discussed how robotic commercial applications in one decade is often based on academic research performed in a prior decade. As specific examples, I mentioned how IRobot has received forms of subsidy through its defense contracts. Robot projects in Japan have received massive subsidy from major Japanese companies in the form of very long term visionary “investment.”


Corporate culture: It is a paradox in high tech that while technological innovativeness is everything, maintaining a corporate culture that fosters trust, teamwork, and balance between all the different corporate functional areas is everything as well. This should be especially true in robotics. Gareth Branwyn points out that there are so many different technologies that come together in robotics that it is very much a generalist occupation.

In regard to teamwork issues, I find it helpful to use two role models as reference points, namely the old “HP Way,” and the company-building approach used by Cisco CEO John Chambers. The "HP way" seems to illustrate successful teamwork between the marketing, engineering, and financial sides of the company, with an emphasis on internal growth. John Chamber's approach seems to illustrate teamwork between the marketing area and other functional areas of Cisco Systems, with an emphasis on growth through mergers and acquisitions that remain focused on core technologies.

William Hewlett
David Packard

The old “HP Way.” For the uninitiated, I am referred to the old Silicon Valley icon under the management of its late founders, Bill Hewlett and David Packard. Hewlett Packard was famous for its open, honest interpersonal relations and flexible, innovative culture. HP was able to keep its organization decentralized enough to be able to flexibly focus on a variety of new product areas, while at the same time it benefited from the economies of scale and stability offered by a large company and the expertise of headquarters staff personnel.

John Chambers: Let me preface my comments by stating that I realize that in this day and age it is risky to use someone who is still living as a role model, particularly in the wake of frequent corporate accounting fraud scandals and the Martha Stewart case. (What next?) However, there seems to be enough about the CEO of Cisco Systems that rings true, particularly in regard to his ability to integrate acquisitions, that I think he is worth discussion. Harkening back to my earlier commentary about abusive conglomerators, I find Chambers fascinating because he might show how robotics companies that are strapped for cash might pool their resources, take on more projects, and grow and increase shareholder wealth in ways that are socially productive.

Howard Charney, who founded 3Com before it was acquired by Cisco, commented “There are lots of people working here who could be running their own companies--who were running their own companies. John treats us like peers. If he treated us like employees we'd be out of here.” According to Chambers, “A large part of our business is based upon trust and working together. Nothing changes behavior like survival.” It’s no longer the big that beats the small, but the fast that beats the slow.” “You want to beat your competition, but you want everyone to win.” Chambers insists on staying extremely close to the market. He said, “At IBM and Wang [where Chambers worked before taking over Cisco], we fell in love with technologies and paid a terrible price.”

Jim Clark, who has founded three Silicon Valley companies with market caps over $1 billion, has echoed John Chambers, “A leader must always strive to get the very, very best people—people who threaten you because they’re smarter than you. You also have to make sure you don’t have high turnover. I have a rule: Never lose the first good person.”

This is more than Boy Scout talk. There are a number of very practical reasons why the aforementioned values are necessary to sustain high tech leadership. Innovation is based on the scientific method, which depends upon scrupulously identifying problems, inviting debate to help overcome them, and providing real world verification through experimental tests. It requires an honest world, where people state what they believe to be the truth, not the truth as perceived by others. This means using logic to get down to the root of things.

From the Latin word for "root" we get the term "radical." Science and technological innovation tend to be inherently radical, impersonal, and logical in nature.

Human organizations are inherently personal, emotional, and subjective. This instinctive element is a huge and vital part of human nature that I address again towards the end of Part Six of this series. However, at some point organizations become so infested with varying levels of politics and intrigue that cater to the instinctive side that they poison the climate required for successful implementation of the scientific method and for sustainable innovativeness.

I have already discussed the perverse politics of imperial conglomerators. Harry Browne's classic work Why Government Doesn't Work. includes other good examples of intrigue in action. According to Browne, when government programs become dysfunctional and produce the exact opposite of what was originally intended, unless there is a major public outcry (as Wendell Phillips put it: "Eternal vigilance is the price of liberty"), the government tends to "keep up appearances" and give these programs even more money and add even more dysfunctional programs in order to act as if it is doing something to solve problems it helped exacerbate in the first place. The net result is that both government and taxes tend to continually grow regardless of performance. According to Browne, government is ultimately about bureaucracy, politics, and force, not about sound economics.

The political process is typically a zero sum game in which its players "spin-doctor" appearances to benefit themselves at the expense of others. At some point the appearances game involves fraud, which entails theft of truth. It steals a person's capacity to make a rational, well-informed decision. It ultimately throws sand in the gears of the scientific process and innovation. This is particularly true in the technology community where so much of its "structure of production" and its incentive structure depends on converting intangible ideas into tangible goods. Fraud undermines the climate of trust required to sustain long term project gestation periods.

If I were to try to summarize the last few decades of management guru literature in three paragraphs, it would be as follows. In the long run, we have to deal with reality and create real and useful tangible things to create wealth. Successful management involves harmonizing at least three areas a) the "genetic" or instinctive side of human behavior (both individual and social) b) utilizing the scientific method to uncover truth and make sound decisions and c) utlizing sound entrepreneurial calculation and implementation methods, to include conducting competitive industry analyses and using discounted cash flow techniques.

At higher leadership levels, a great many if not most people lack the right combination of experience, knowledge, emotional maturity, self-discipline, independent analytical judgment, or organizational support to be really truthful, personally effective, or rational, and feel that they have to rely on shortcuts and deceptions to survive. There are untold millions of short cuts, ruses, and gimmicks they can use to get by, ranging from accounting manipulation to leadership practices that give the appearance that they are being effective when in reality they are parasitically running down the organization. What gets really dangerous is when the short cuts become accepted as conventional wisdom, and dysfunctional practices get added on to "solve" other dysfunctional practices, creating vicious circles.

It can be tricky to discern the "reality" required for success, how we define "success" in terms of financial data or overall benefits to society, and the leadership traits required for a particular situation. For a sales organization that deals in intangibles to meet quotas, dealing with "reality" may require a relatively charismatic manager who can motivate people to handle rejection in making cold calls and keep them focused on closing prospects. For a high tech R&D company where the "value added" of its products is highly measurable in physical terms, and "reality" means innovative engineering problem solving, a highly effective leader may be a very bright but relatively anti-charismatic and unassuming person who does not allow his ego to get in the way of achieving tangible results working with technically brilliant colleagues.


My Real Baby doll was an impressive effort to commercialize technology. It bought a ticket in the doll industry "lottery" which unfortunately did not score a blockbuster jackpot. iRobot probably deserves an "A" for effort anyway.

From a risk-adjusted perspective, smart dolls probably represent the opposite kind of market where the best rewards may be found in mobile robotics over the next five years. My Real Baby was designed for purchase by price sensitive and relatively unsophisticated and fickle consumers and does not scale very well. How wonderful it would be to design a robot for a market that can support the old IBM mainframe lease model (much more lucrative, particularly with embedded consultant fees, than the more commoditized purchase model), is strongly appreciated by tech savvy people (whose appreciation helps create technical barriers to entry), who have an immediate and consistent market need (rather than wavering with fads), who have ample spending power that is fairly price insensitive (market inelastic), and who comprise a growing market for which the robotic product scales extremely well.

A major source of funding for robot companies in America has come from the government, particularly DoD. But government funding is typically a two-edged sword. Yes, government contracts help cover overhead and provide a cash cow for roboticists to continue practicing their craft and exploring important R&D areas. The money the US Government has spent on robotics is probably one of the few areas it has actually done something really right. However, there is that other side of government covered by Harry Browne which distorts free enterprise economics.

I believe there is a legitimate place for government. I support national defense. However, I recognize how it can become very unhealthy for companies to become too dependent on feeding off the public trough.

The government survives on taxes, which are backed by the threat to use police and military power to kill citizens who do not pay up. Every penny that someone receives from the government has been collected with an implied death threat. In addition, government leaders are typically rewarded rather than punished for malinvestment. In contrast, the free enterprise sector survives by offering goods and services traded by voluntary consent, and is incentivized to engage in competent investment. There is a big difference.

Professor Laurence Kotlikoff of Boston University voiced concerns about the future of government funding in his 17 May 2004 Fortune article "Why Things Could Get Really Bad." He stated, "Hyperinflation is a real and present danger for the simple reason that the U.S. Government is effectively bankrupt. Its fiscal gap is $51 trillion, when measured as present value. That's 11.6 times official debt, 4.5 times GDP, and 1.2 times private net wealth. Coming up with $51 trillion without a printing press would require, immediately and permanently, either hiking federal income taxes 78%, cutting Social Security and Medicare benefits 51%, or eliminating more than 100% of federal discretionary spending, which ain't easy."

For over a decade the Fed has been ramping up the money supply at around 10% a year. It increasingly needs to buy America’s debt to substitute for the increasing unwillingness of foreigners to finance America’s continuing balance of trade deficits and its deficit government spending. As the American economy continues to look more like that of Argentina and Brazil, we can expect a growing squeeze on government funds available for robotics-related education and research.

Outside of government R&D contracts, American robot companies have typically been forced to use a relatively short-term time horizon and“bottom up” market-driven approach. One important reason is that major corporate technology players such as IBM, Microsoft, Intel, and Cisco have held back (so far) from making major investments in this area. Hopefully in the near future they will begin to adopt a more far-sighted attitude like their Japanese counterparts.

Going forward, anything that increases involvement in the robotics arena by American companies with proven track records in the free market will probably be very good news.

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Disclaimer: This report is for research/informational purposes only, and should not be construed as a recommendation of any security. Information contained herein has been compiled from sources believed to be reliable. There is however, no guarantee of its accuracy or completeness.

Bill Fox is VP/Investment Strategist, America First Trust. Bill welcomes phone calls and email responses to this article. His most current contact information is at his web site: www.amfir.com.

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© William Fox. Sometimes William Fox offers viewpoints that are not necessarily his own to provide additional perspectives.