Venture capital investments in IoT often follow the ability to build the “best tech” the quickest. However, once businesses start looking at second stage funding from private equity then the rules of the game change and it is customer rather than tech focus that wins the race.
The IoT market is maturing with many businesses now moving past the development stage and through to delivering market ready solutions. As this happens more entrepreneurs are beginning to consider further funding and questioning how much their IoT business is worth.
As an active investor in this space, one truth we have seen is that founders can place a higher valuation on their business than external funders based on how innovative they believe the tech is and how much potential it has to disrupt the market. Where this is challenging is that they often lack case studies of successful implementation and a track record of sustainable revenues. Whilst IoT has the potential to disrupt a lot of industries, it is the ones where IoT solutions are delivering a proven ROI which are scaling.
For example, the industrial IoT solutions market is currently booming as more businesses are developing tech in this sector with cost-out front of mind. Consider tech being sold to large agricultural producers to improve their asset management, health and safety and operational monitoring around refrigeration, light and noise. There is the benefit to them of being able to develop a platform that can provide real-time in-depth data through implementation of top of the range sensors, but you also need to prove how this tech will help them to optimise performance of assets and reduce spend on energy, system maintenance and manual compliance. Case studies that can show a demonstrable return on investment are much more successful sales tools than demos of the tech.
We have seen this in edge computing, another good example of where IoT tech is demonstrating fantastic ROI. Edge computing can deliver real time data processing at source which reduces the amount of data that needs to be transferred unstructured into the cloud. By consolidating, filtering and labelling at the edge, a business can reduce the amount of duplicated data clogging up bandwidth and significantly decrease hosting costs. As the ROI on this tool is delivered at real speed, with payback normally expected between 12-24 months, I anticipate this will be a key area for private equity IoT investment.
Similarly, investors will be more interested in businesses selling tech which retro-fits rather than replaces existing infrastructure. By considering customer needs and budgets, rather than creating bleeding-edge solutions that require asset replacement, you are more likely to be the winner when disrupting traditional models. And in turn because you have an upper hand in acquiring and retaining customers, you are far more likely to attract follow on funding from mid-market private equity beyond early stage VC investment.
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