New $20 million VC fund targets hot hardware startups

SAN FRANCISCO--Robots and drones and satellites, oh my.

A new $20 million fund aimed at hardware startups is the latest sign that Silicon Valley investors are increasingly looking beyond software.

Lemnos Lab, a two-year-old early stage venture capital firm with three portfolio companies having already reached Series A funding said today its new fund will be aimed at hardware companies, especially those developing products in the aerospace, robotics, connected devices, transportation, and agriculture fields.

Founded by two 29-year-old MIT graduates, Jeremy Conrad and Helen Zelman Boniske, Lemnos Labs runs an incubator in San Francisco's Dogpatch neighborhood. There, it provides its portfolio companies with office space, equipment, and access both to other hardware startups and frequent industry visitors.

Though the firm won't identify the institutional investors who raised the $20 million for the fund, it's clear there are a number of factors that inspired their investments. For one, Lemnos has already demonstrated a track record for success. Out of its previous, $1.85 million fund, its ten portfolio companies have raised a total of $35 million, with three raising Series A rounds.

In addition, Lemnos' focus areas are already proving to be in very lucrative markets, suggesting a higher likelihood of profitable exits for the investors. For example, Google has recently purchased eight robotics companies. And while it's not clear how much the search giant paid for those companies -- including Boston Dynamics -- it's thought to be well into nine figures or higher. Similarly, 194 aerospace startups tracked by AngelList have an average valuation of $5.1 million.

According to Conrad, Lemnos invests an initial $100,000 in each of its portfolio companies, in return for a 10 percent stake. In some cases, he said, Lemnos may raise the investment to $250,000. Each portfolio company is asked to spend between a year and 18 months working inside Lemnos' Dogpatch warehouse, a period the firm believes is crucial to the cycle of a startup's development.

All told, Conrad said, Lemnos plans on making between eight and 12 investments per year, and its goal is that half of them to reach Series A funding.

Over the last couple of years, a major narrative in Silicon Valley has been the so-called Series A crunch, a dynamic that has made it harder for post-seed stage startups to raise the $5 million or $10 million they need to survive. But Conrad said that hardware has been immune to such a crunch. In part, he said, that has been driven by the huge exits by companies like Nest -- which was purchased by Google for $3.2 billion. Facebook's announcement yesterday that it has purchased Oculus VR for $2 billion will only fuel the hardware investment fire.

Lemnos, of course, is not the only hardware incubator. Others, like Level 2 and HAXLR8R, are also putting money into the space. But Lemnos hopes that it can stand apart by building a community around its portfolio companies. Each becomes part of a growing network that Conrad and Zelman Boniske are fostering, helped along by the regular help and mentorship of industry leaders who visit Lemnos' offices.

In fact, Conrad said, much of Lemnos' deal flow is coming to the firm from VCs who aren't ready to fund early-stage companies. In turn, Lemnos sends its successes to the larger VCs when they're ready, he said.

Among Lemnos' companies are Airware, which created a development platform for drones, 6Sensor Labs, which is developing devices to help people test their food for gluten and other ingredients, and Compology, which has built a system to help cities better manage waste collection.