"If we were a public company, we would have had to publish a profit warning in May," says Friendly Robotics co-founder, CEO and chairman Udi Peless, about the company's attempt to penetrate the US market. He was commenting on the attempt to convince American suburbanites to open their hearts and wallets to a lawn-mower that does everything by itself. and costs less than $1,000.
Why a profit warning? Because Friendly Robotics's timing for its market launch was rather poor: Just as the US was entering a major slowdown in demand for consumer products; and not during the summer mowing season.
The Challenge Funds are leading a $6-7 million financing round for Friendly Robotics at a company value of only a few tens of millions of dollars. This meager value belies the company's recent dream of floating shares on Nasdaq at a company valuation of $150-200 million. Last year, the company held a financing round at a company value of $85 million.
"The initial problem lay in the early financing rounds," said Peless in a recent interview. "Israeli consumer products companies have a short track record. Our current investors demonstrated vision and courage when they invested in us. They also gave us good direction. We now receive requests to invest in us on a daily basis."
Nevertheless, Peless is apparently facing problems during the later financing stages. In November 1999, the company raised $8.2 million at a company value of $35 million, after money, and is now raising money at a quite similar value.
The calculation for the company value is quite simple. Check the sales multiples of public companies selling similar consumer products in the US, multiply by the estimated sales for Friendly Robotics this year ($6 million), and you arrive at a fairly good estimated value.
Company sales more than doubled in the past year, but have not reached investors' expectations, especially for the US. 2000 sales in the US totaled $3 million, instead of the goal of $6 million, and wildly optimistic forecasts of $10 million.
"Globes": Are you surprised by Friendly Robotics’ present valuation?
Peless: "We're raising money at the price the market is prepared to pay. Things aren't what they were a year or more ago. That’s life. I think the fall in the company value is explained by the capital market climate and the unsuccessful, aggressive US marketing campaign. Although our sales are quite good, we haven't yet reached the levels we initially promised our investors. I consider the price correction as a tactical move. Shares go up just as they go down."
You launched into the US market out of season. What about Europe?
"Consumers buy lawn-mowers in May-June. We prepared ourselves for this time, but didn't foresee the US recession, which pushed our sales below forecasts. We're meeting our forecasts for Europe."
How would you describe the demand for what is considered a luxury item during the recession?
"We definitely feel the drop in demand, but we're not positioning the product as a luxury item. The product is innovative, and people say they've managed quite well for 30 years without it, and they don't need it now, thank you very much. We obviously aren't talking about a cure for cancer. However, our market research shows that it isn't the top decile buying our product, but the middle classes – the people who used to mow their own lawns and want something else."
How did you manage to cut the burning of cash?
"We carried out cutbacks several months ago, including lay-offs, unfortunately, but also in non-essential areas. We adjusted our expenditures to market demand and growth rates. The company now has 70 employees, down from the 100 employees we had worldwide, at our peak."
Are you delaying the launch of future products, or cutting back on development?
"No. On the contrary, we're pushing full speed ahead with developing robotic infrastructures and products. The board decided that while we would cut costs, we must not harm the company's strategic goals."
Friendly Robotics was founded in 1995 by Udi Peless, and Senior VP R&D Shai Abramson. From the outset, the company was based on the founders' vision that the time was ripe for a new type of mobile home robot that would do the dirty household chores. The first application they thought of was the lawn-mower, the product now most identified with the Friendly Robotics name. The company is also planning vacuum-cleaners, floor-polishers, snow-blowers, and golf carts.
The products use innovative navigation technology with ultra-sound sensors to locate obstacles. The lawn-mower first scans the previously marked-off area scheduled for mowing, and then mows it from the borders inward.
It can be said that Friendly Robotics' business vision definitely has cross-border appeal. Rare are the Israeli technology brand names that international corporations want to exploit and distribute worldwide. Israeli companies also want OEM agreements. After all, Frau Schultz in Berlin won't buy a Middle Eastern-brand refrigerator when she can buy AEG or Siemens. But Friendly Robotics is the exception: It offers dream technology, attractive design, jealousy from neighbors over the greener grass, convenience, and above all, price.
Peless says, "We think that the home robotics market is going to be monumental, reaching the volume of the home appliance market within 5-10 years. Household robots will be bought by nearly every household. We haven't changed this vision in three years, since the beginning of the development of our first product."
The first product was the company's famous lawn-mower, launched two years ago. The company is now in the final development stages of the second generation products, including vacuum-cleaners and floor-polishers.
In order to underscore the attractiveness of Friendly Robotics' products and their relationship to artificial intelligence, Peless remarks that the company's products almost made it onto Stephen Speilberg's latest movie, AI. Friendly Robotics showed Spielberg several robots and blueprints, but he decided not to use them because of commercial and advertising considerations.
Did you decide in advance to use the Friendly Robotics brand name, in addition to OEMs?
"Yes. We definitely wanted Friendly Robotics to become a known brand name, but we also have OEM agreements with leading lawn-mower manufacturers. We allow them to sell our technology under their brand names, but we haven't surrendered our independence (and ability to) market directly under the Friendly Robotics brand."
"We think we have a great opportunity, because of our lead position in this technology revolution. Our product is unique enough, different, and attractive enough to allow us to build a distribution system under our brand. However, in order to develop the market as quickly as possible, and for the sake of caution, we haven't neglected the OEM strategy with leading global manufacturers, either."
Last year, Friendly Robotics signed a licensing agreement with The Toro Corporation (NYSE: TTC), a leading lawn-care and lawn-mower manufacturer in the US. Toro committed to buying $100 million of Friendly Robotics' product over five years, and is being granted exclusive rights to sell the product to the Home Depot retail chain.
Friendly Robotics also signed an OEM agreement last year with lawn-mower manufacturer Stiga, controlled by Swiss investment bank UBS, which merged in 1999 with Italian manufacturers Castel Garden and Alpina, to create Garden International, Europe's biggest lawn-mower manufacturer.
What guarantees do you have with the US and European companies with whom you signed OEMs?
"The OEMs are reciprocal, exclusive agreements with the two companies. We won't sell our technology to their local competitors, and they won't buy our competitors' technologies. We'll sign similar agreements with leading global vacuum-cleaner manufacturers. We're building our distribution channels, and differentiating between retail chains offering our products and those offering the products of our competitors."
You're undoubtedly encouraged by the fact that your competitors are selling robots and developing this new market.
"The market is definitely new. It's not a situation in which we have a 60% market share, and any robot we sell is a robot not sold by our competitors. All the present players in this market have a similar market share. I think the proper strategy for us at this stage is to develop the market. I believe we'll start to have problems when we reach 30% market share."
Will you open offices in each country you enter?
"No. We work with independent distributors, usually one per country."
What's the potential market size?
"15 million ordinary lawn-mowers are sold annually. There are 110 million homes with lawns in the West: 55 million in the US; 45 million in Europe, and 10 million in Australia and South Africa.
Who are your competitors in the lawn-mower market?
"Our only competitor is a Swedish motorcycle manufacturer called Husqvarna. Their product preceded ours to the market by two years, but its technology and performance are inferior."
At the current price for lawn-mowers, how many units will you have to sell to reach profitability?
"To reach profitability, we'll have to sell 25,000-30,000 units, which translates into sales of $15 million. We believe we'll approach the break-even point next year, and become profitable in 2003."
Published by Israel's Business Arena on 17 July 2001