IoT Financial Outlook

IoT Financial Outlook
by Tom Simon on 12-04-2014 at 7:00 am

 As exciting as the Internet of Things (IoT) is, the question of how and which companies stand to make money in this market remains. From previous waves of internet markets we have seen surprising wins and epic loses. How is the IoT market shaping up? And what are the real business drivers? According to a Silicon Valley Bank analysis, it’s important to look at IoT company market segmentation, and also to look at the relative size of these companies.

There are three areas of advancement that are fueling the current generation of IoT. First off is the increasing affordability of MCU’s, wireless devices and other hardware needed. Second is the ability to power back-end analytics needed to properly harness the information collected at the edge of the IoT. Lastly, are the economies provided by increasing numbers of connected devices. Metcalf’s Law asserts that the value of a communications network increases as the square of the number of attached devices.

Each of the drivers however faces potential hurdles. At some point decreasing hardware costs flatten out. For instance older nodes are used for a lot of RF and IoT devices. They will not see big costs per function cost decreases due to Moore’s Law. Big data and cloud resources used for analytics may need to be updated to deal with ever larger amounts of edge data collected. Ambiguity exists concerning whether a lot of connected devices have the same effect as ‘users’ for the purposes of valuing a communications network. Also we see the need to harmonize LTE networks, and make sure that other connectivity is easy to set up, secure and deploy.

Additionally other risk factors for business growth are power sources, software architectures and the brute force cost of adding connectivity to our existing ‘things’.

But the real question the SVB report raises is where will the pull for IoT business come from. Many large companies have been promulgating use scenarios for their IoT products and services, but are not seeing return on their investment. At the same time smaller companies are making inroads into markets and seeing real growth. Their challenge of course is to scale their growth so it becomes significant. VC investors are looking closely at their IoT funding. The SVB report states that angel money is supporting many more start-ups than the available series A funds from VCs can support in the long term. This means there will be a pruning.

Even within the start-up segment, critical mass is necessary for financial success. Early stage IoT companies making over $10M are seeing better sales growth than others in their peer group. It takes a big investment to get an IoT company to a higher valuation. The SVB report shows that series D rounds are most likely to be Up-Rounds for IoT companies. C rounds are the most perilous with close to 40% of companies having decreased valuations. If investors can stomach on average of $30M so a company can get past series C, those companies will have a better chance of giving their investors a good return.

The most interesting information in the report showed which market segments within IoT are prospering. Not surprisingly the IoT enablement category is performing well, with good growth, but hindered by higher costs of goods sold (COGS) and operating expenses. This category includes the hardware and software that is used as a foundation for IoT products.

The healthcare market seems to be a made to order market segment for IoT. Despite long leads times for product certification and extra effort required to meet the security requirements, healthcare has a growing demographic and many drivers for growth. Improved care levels and lowered costs for all kinds of medical monitoring, both at home and in hospitals are a big win. There is a clear cut ROI benefit for IoT devices in this market. Presently lack of scale is holding some of these companies back, but increasing demand can remedy this.

The third market segment featured in the SVB report is energy. Once again we see a very strong ROI for utilities and consumers. And in a less tangible manner there is a large ROI for our planet. Most of us already have smart meters and can monitor our power usage with increased granularity and almost in real time. This has ripple effects that go beyond reduced bills, to things like lower capital infrastructure costs from optimizing power plant utilization. By monitoring and controlling power consuming devices consumers can take advantage of dynamic rate structures that help manage power grid efficiency. This is a great example of how the IoT has grown from a simple point to point connection to a multi node multi directional system that can provide big leverage. But it also will require all the elements listed above, such as big data, connectivity, and sophisticated edge technology in the form of MCUs and communications devices.

As the IoT matures many people will be looking to see where there is growth and potential for profit. The development of real high value use cases will be essential. As is the case with disruptive technology shifts the winners and losers will be hard to predict this early in the game. But investors have learned to proceed cautiously, so hopefully we will not see a bubble, but rather rational growth and expansion.


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