If there’s one thing the world has not been lacking in the past year, it’s discussion of how much the Internet of Things (IoT) will change business. From product design to partnerships to business strategy, the IoT has been having an effect on it all. But what I have not seen covered in much detail, until now, is how the IoT is changing the industry investment model.
Last year, the Industrial Internet Consortium’s Thought Leadership Task Group commissioned a project with New England Partners to find out “what was changing, how companies were evaluating new opportunities, and what were considered best approaches” when it came to IoT-related investment across industry.
According to the Industrial Internet Consortium (IIC), traditional investment models “simply don’t work” when it comes to IoT-related investing. One venture capital executive told the IIC that “IoT is turning the venture capital model upside down.”
So what’s so different about IoT-related venture capital (VC) investments? Let’s start by revisiting the basic VC model, wherein the investors are typically influential in determining a company’s management team and who have an exit strategy planned for just a few years after the company’s founding so as to make the highest amount of return for the smallest investment. As IIC states in its research report, the traditional VC strategy is essentially about the “fastest and most lucrative exit strategy possible.”
According to the VC executives IIC interviewed for its research, the traditional VC model doesn’t always apply to industrial applications of IoT because:
The VC model isn’t suited to the Industrial Internet of Things (IIoT) since there is no “billion dollar” exit strategy;
VCs have money for IIoT investment, but they don’t have the kind of information about industrial companies and use cases that can help a startup; and
The VC community is confused about the opportunities around the IIoT because of the need for a new business model, the incumbents are too large and the game isn’t changing fast enough, and VCs are known by the areas in which they specialize—which means there isn’t enough money going around to have the larger VC firms dedicate a person to the IIoT.
Given the current status of IIoT investment, many VCs interviewed by the IIC said they were “more interested in acquiring people than technologies” at this point. The IIC says these investors are interested in “people with experience in specific areas, like data analytics software.”
“You need to surround yourself with different perspectives and backgrounds,” Robert Locke, senior vice president, Corporate Development at Tyco, said in the IIC research report. “Don’t get bogged down in process. Your mindset is as important as the market space. You won’t know exactly how you might engage and in what way. You just know that you need to find a way to solve a customer problem and you can’t do it alone.”
This realization is driving a lot of activity in the industrial market today, and not just among start-ups, but among established companies—as evidenced by the recent acquisitions of Kepware by PTC and B+B Smartworx by Advantech.
As Jem Pagán, managing partner at Flatiron Strategies, stated in the IIC report, “Strategic acquisitions are the new R&D for industrial companies. For VCs, ROI is the primary driver. Industrial companies make investments based on market conditions more so than for pure ROI purposes. VCs are looking for one big check at the end of their investment cycle. Industrial companies are looking for sustained market share (and protection) and market growth from their investments.”
The IIoT VC firms IIC interviewed for this research largely all noted their focus is the longer-term goal of transforming existing businesses or creating an entirely new business. As IIC stated in its report: “This is where the need for patience emerges,” when it comes to seeing how the IoT plays out for industry.
Recent Automation World coverage of IIOT-related business partnerships: