Investors missing out on large returns in late hardware entry

Cottonwood Technology Fund's Alain le Loux said investing in early-stage hardware start-ups results in billion-dollar exits.

As it exits one of its portfolio companies in a $1.3 billion SPAC, Cottonwood Technology Fund said most investors are missing out on large returns by not investing early in hardware.

One of its portfolio companies, Sarcos Robotics, will be acquired by the SPAC Rotor Acquisition Corp for $1.3 billion. Once the deal closes in June, Sarcos will list on Nasdaq under the ticker name STRC. Sarcos makes robotic exoskeletons that are touted to help humans lift heavier objects and other robots for industrial and defense use.

Alain le Loux, general partner at the early-stage investor which focuses on hardware, said very often other investors want to wait until hardware start-ups have more sales or a proven customer base. But investing early in hardware means high returns.

“In most early-stage cases we are the only interested investor because in the pre-revenue stage no one else is willing to take the risk,” le Loux said. “Only once [did] a start-up have two term sheets on the table.”

le Loux Cottonwood Technology Fund
Alain le Loux, Cottonwood Technology Fund

Cottonwood Technology, which focuses on the Southwest US and Northern Europe, funds deeptech and hardware start-ups in various sectors. Sarcos Robotics is based in Salt Lake City, Utah.

Le Loux said one thing the company has done is to educate not just other venture firms but LPs, too, about the advantages of investing very early in deeptech.

The firm expects to see more billion-dollar exits this year. Le Loux said Cottonwood Technology currently has three portfolio companies “doing quite well and all of them are prepared for an IPO or being picked up by a SPAC.”

This includes photonics company Skorpios Technologies, on-site hydrogen producer BayoTech and Infinitum Electric, which manufactures electric motors. He said Cottonwood Technology expects all three start-ups to exit above $1 billion.

Cottonwood Technology is currently in its third fund. It so far raised €40 million of its €100 million target and is still in fundraising mode, according to le Loux.

The venture firm made a €1 million investment into Dutch healthtech chip processor Sencure at the end of April. Sencure makes ultra-low-power biometric sensing chips used in wearable health monitoring systems. Le Loux said Sencure could help bring down healthcare costs by removing the need for large batteries and wires to power heart rate or brain wave monitors.

The venture firm, founded in 2010, has offices in Santa Fe, New Mexico and the Netherlands. It counts among its LPs manufacturing giants such as Caterpillar Ventures as well as family offices and high-net-worth investors from Europe and the US.

Le Loux said Cottonwood’s success lies in its penchant for investing very early in start-ups with strong intellectual property and unique, difficult-to-replicate technology.

“We spend six to 12 months evaluating the research and talking to corporations to see if there’s a market and most importantly, what are the hurdles as to why they would not use this kind of technology,” he said.

Le Loux noted that investing early in hardware start-ups has been profitable for the firm and that governments across Europe are also encouraging investors to fund deeptech and hardware companies. He cited initiatives by Germany and France to support start-ups across many sectors, including deeptech and hardware. CNBC reported that European countries began rescue plans for tech start-ups in 2020.