The Internet of Things as Seen by Venture Capitalists – Massive and Inevitable

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Connecting billions of objects to the Internet—a process that we call “Instrumenting The Real World”—is going to have a transformative impact on the enterprise and on society, and we’re still only in the very early stages of this change.

Martin Giles, Partner at Wing Venture Capital (San Francisco, CA)

Kudos to Martin and his team for his excellent outlook on the Internet of Things (and for generously sharing the slide deck here) and for keeping us up-to-date on the Wing blog here. Wing built a database of 2335 accelerator and venture capital funding deals for IoT startups from the start of 2013 to the end of August 2016, drawn from helpful services like Mattermark, Pitchbook and Crunchbase.

“Gaurav Garg, one of Wing’s co-founders, draws an insightful parallel between the Internet of Things and the spread of electricity to US households in the 1900s. As electrical power made its way into more and more homes, entrepreneurs set to work developing new products to take advantage of this phenomenon. But it took decades for some of the most innovative applications to appear. Many of these, from the television to the microwave, were simply impossible to conceive of in the early days of electricity. The Internet of Things is at the same stage today as electricity was in the early 1900s: we can see the potential of this new wave, but only a small fraction of things are currently connected to the internet.” Here are the key findings of Wing Capital:

Grassroots entrepreneurial activity still appears moderately healthy, though there are signs of a slowdown.

GitHub is a pretty good temperature gauge of early project activity, and the number of GitHub code repositories that have IoT as a keyword is on track to more than double this year according to publicly available data. Successfully funded IoT-related projects on Kickstarter are also set to rise again in 2016, but the pace of growth is slowing.

Industrial/Enterprise IoT accounts for the largest number of funding deals over the past few years, followed by Wearables.

The Industrial/Enterprise category came out on top (over all verticals) with almost 600 deals (stemming from) the “Factory or Industry 4.0” era, in which a combination of sensors, software and back-end cloud compute and storage is giving companies new insights into the performance of their physical assets. On the Enterprise front, we saw a reasonable amount of activity in sub-categories such as building management services, healthcare and retailing.

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Picture Credit: Dell Automation

Ranked by average deal size in dollars, the Auto/Transport category comes out on top

Auto/Transport sector yielded the largest ave $/deal with an average of almost $8M a deal (yet the fewest number of deals.). Yet companies such as Tesla and Uber have inspired startups working on connected car and autonomous driving technologies, the two biggest sub-categories within the Auto/Transport field. This year has seen some big exits in the form of General Motors’ acquisition of Cruise Automation, a connected vehicles startup, and Uber’s purchase of Otto Motors, a driverless truck startup.

In the Drones category, hardware deals still dominate, but we also saw a lot of startups working on applications for aerial surveying and mapping, as well as inspection and monitoring

The Drone category is really open territory, at least in the non-military arena: hardware, drone-level innovation to optimize enterprise services (like aerial surveying and monitoring), software and analytics. 3D Robotics, pivoted towards offering drone-based services to enterprises after facing intense competition in consumer hardware from DJI, its main Chinese rival.

In 2016 four IoT categories are likely to see fewer deals than the prior year, while four others will see an increase over 2015

The number of deals in all of the high-level categories that we tracked rose every year from 2013 to 2015. This year will break that trend. Four of the categories—Industrial/Enterprise, Wearables, Home, and Robotics—will see a decline in deal activity in 2016. Meanwhile, four others—Drones, Infrastructure (which covers startups developing building blocks for the IoT, such as low-power wireless connectivity), Health and Auto/Transport—will grow again.

In terms of funding activity, the number of IoT startup deals in the sub-$2M range will decline in 2016, while the number of those in the $2M-to-$20M range and the $20M+ range will increase

The number of larger deals is expanding, which is an encouraging sign that at least some of the startups founded over the past few years have developed business models that are inspiring follow-on financings. The growth in deals above $20M is especially notable: there are likely to be five times more of these this year than in 2013.

The number of large M&A exits involving IoT businesses is set to expand again in 2016

Pitchbook (data) showed that the number of M&A deals over $200M is set to increase again in 2016, as a sign that incumbent firms who see the Internet of Things as an opportunity are willing to commit significant sums of money to acquisitions. This year has already seen some billion-dollar-plus M&A exits. Sensus, a smart meter company, was bought by Xylem for $1.7Bn, and Jasper, an IoT connectivity management platform, was acquired by Cisco for $1.4Bn.

There’s been a proliferation of IoT platforms and this outbreak of ‘Platformitis’ is likely to lead to a shakeout over time.

“Platform” deals totaled 707, or almost a third of our entire data set, with the largest number of platform deals were in the Industrial/Enterprise category, which is understandable given that customers there are looking to connect a wide variety of devices at scale. The second largest category was the home: people want the smart devices in their homes to work together seamlessly.

There have been relatively few deals for IoT-focused security startups

In our overall database of over 2300 deals, we found just 45 that were for IoT security startups. That is a surprisingly low number given all of the risks associated with connecting billions of new devices to the internet—risks that have been highlighted yet again by recent events, such as the use of IP cameras and other connected objects like home routers to launch a massive Distributed Denial of Service attack against Dyn, a domain name service provider, and another case in which hackers were able to take control of a Tesla Model S from 12 miles away.

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Wing’s Peter Wagner adds, “data-first services are starting to emerge in many of the major enterprise-application categories. Companies such as Vlocity in customer relationship management (CRM), Moogsoft in IT operations and Kanjoya (now with Ultimate Software) in human resources are among startups driving the new, data-first approach.” These data-first applications are: flexible, architected on a scalable data-centric core, heavily reliant on embedded algorithms, and are iterative – creating “a virtual breeder reactor of business-process optimization and insight generation.” Wow, that’s a tech endorsement !

 

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