Positioning a Startup in the IoT Industry

Industry Trends
Written By Kevin Eckenrode

Key Insights

  • Marion Street Capital believes that IoT startups will continue to see an influx of capital as the IoT industry more than triples in size over the next 6 years.

  • The IoT market may generate more than $1.1T in revenue by 2026.

  • There are almost 2,000 startups in the IoT industry that collectively received $14.9B in funding.

  • IoT technology can significantly improve company margins by reducing operating expenses in the manufacturing industry by up to 40%.

  • 60% of IoT startups fail to emerge from the proof of concept stage.

  • The three ways an IoT startup can position itself for success is by adapting its technology, by identifying a sustainable competitive advantage, and by developing a plan to compete with the tech giants.

Market Overview

The applications of the Internet of Things (“IoT”) industry are potentially endless in improving both the efficiency and operational capability of businesses. As the global economy has shifted to mass automation and “smart” businesses, the amount of technology in our homes and businesses is at an all-time high. Because of this, demand for infrastructure to support communication and integration between all this technology is soaring. IoT will undoubtedly support this shift across sectors, most notably in healthcare, banking, transportation, energy, retail, manufacturing, and real estate.[1] According to CrunchBase, 1,955 startups in the IoT industry received $14.9B in funding from investors across 4,488 total funding rounds. This equates to an average of 2.3 funding rounds per company and $3.32MM per funding round.[2] Overall, Fortune Business Insights projects the IoT market to grow from $190B in 2018 to $295B in 2020 to $1.1T in 2026, representing a CAGR of 24.7%.[3] Major players in the IoT industry include existing tech giants such as Dell, Amazon, Intel, Samsung, and Google.[4] The industry also includes smaller, exclusively IoT-focused players like home security firm SimpliSafe, which Hellman Friedman acquired in 2018 in a deal valued at $1B.[5]

Why is the IoT market expected to grow by such a significant margin over this time frame? For one, IoT-based technology significantly reduces operating costs for many types of businesses. In the manufacturing industry, for example, McKinsey estimates that IoT-based predictive maintenance will reduce equipment maintenance expenses by up to 40%.[6] Computing power, data collection, and wireless capabilities improved significantly over the past 5-10 years, allowing for IoT and other advanced technologies to leverage their power. An instance of greater wireless power is 5G technology, which is ten times faster than 4G and which will allow billions of devices to stay connected and to share data at amazing speeds. Therefore, 5G should be a key catalyst for accelerating the effectiveness and growth of advanced technologies like IoT.[7] With growth in these advanced technologies, problems such as the maintenance repair example will no longer exist. 

As the IoT industry grows, opportunities will continue to emerge in complementary industries such as artificial intelligence (AI), machine learning, and cybersecurity. These four industries must be implemented in businesses in a coordinated and comprehensive way; utilizing just one independently will likely be ineffective in solving a key business problem. CAGRs in the AI, machine learning, and cybersecurity industries are projected to be 33.1%, 43.8%, and 12.6%, respectively, over a similar time frame.[8],[9],[10]

Growth and Shakeout

While IoT technology is robust and applications are potentially infinite, 60% of IoT startups fail to emerge successfully from the proof-of-concept stage.[11] In many respects, IoT and other highly advanced technologies are still in their infancy stages. Because of this, many of these startups are falling short due to issues such as budget constraints, unanticipated degree of technological complexity, or lack of unity between the technology solution and the business problem.[12] Additionally, development time for IoT hardware is considerably higher than typical software, and therefore it is much harder to pivot if things go wrong.[13]

According to Pete Staples, President of IoT-focused company Blue Clover Devices, there are several ways an IoT startup can avoid falling short and better position themselves for success. In such a rapidly growing industry, seizing these unique opportunities before a competitor enters the mix is critical.[14]

  1.  Adapt to the pre-existing device ecosystem.

    This applies especially if the IoT technology will be consumer-facing. Startups in the IoT industry need to optimize their technology for use on current devices, such as the iPhone, Amazon Alexa, or Google Home to create an interface that will work seamlessly. As these devices and their software constantly change, IoT firms must stay ahead of the curve and adapt to the current standards, as opposed to building out their own infrastructure. Having the technology is great, but the millions of potential customers you are trying to reach do not want to go out of their way to use it.

  2. Identify sustainable competitive advantages.

    Pete Staples identifies the unique case of Pebble, a once popular early mover in the smartwatch space. FitBit acquired Pebble as they heard footsteps of giants like Apple lurking behind them. While Pebble engineered a lot of the IoT tech behind their smartwatches, they were creating something that firms like Apple could easily replicate given their vast amount of resources. Startups in the IoT space need to find a niche in which they can succeed.

  3. Prepare for how you will compete with tech giants.

    Like strategy II above, if an IoT startup builds something people want, a tech giant like Amazon or Apple can use their resources to copy it. Identifying early on whether the startup is a partner or competitor to these massive tech firms will be a critical strategy in both the short-term and the long-term. Nest and Ring are companies in the IoT space which figured out that their best paths were to join the “giants”, as Google and Amazon would later acquire them, respectively. According to Staples, finding a niche in the projected trillion-dollar industry will help startups in IoT stay out of the parasitic path of large competitors, if they choose the competition route.

About Marion Street Capital 

Marion Street Capital (MSC) is a business growth consultancy helping innovative growth companies solve their most pressing challenges.  
We collaborate with ambitious leaders to provide time-saving partnership, unparalleled support, and world-class expertise designed to ensure lasting business success — at scale. We work with clients to achieve growth of 10x or more by delivering world-class services in five key areas: FinOps, DataOps, RevOps, HROps, and SpecialOps. 

MSC’s resources include relationships with institutional investors (family office, private equity firms, venture capital firms, hedge funds, and mutual funds), relationships with local and international banks, “expert networks,” relationships with top academic institutions, outsourced software development teams, graphic design services,  
and industry information providers. This robust suite of services enabled MSC to help clients across 16 different industries during the last two years.

Kevin Eckenrode
Previous

Trends in the Cloud Industry
Next

The Future of Retail