There are distinct differences in investing in industrial Internet of Things opportunities compared to “traditional” venture investing in consumer or enterprise technologies. We’ve interviewed several investors for our podcast series including David Mount, Partner at the VC firm G2V, Rumi Morales, Partner at Outlier Ventures and Mike Dolbec, Executive Managing Director of GE Ventures. We contrast the focus on high-growth, speculative investing that characterizes many of the well known tech Venture Capital strategies with the more deliberate, slower growth yet more stable dynamics of industrial IoT investing.
Shooting for the moon – and missing a lot
The economics of venture investing often follow a “hit-driven” model – typically investors look for outsize returns on a small minority of their investments to offset losses on the majority of their commitments. It’s not uncommon for one or two investments out of a fund portfolio of a couple dozen startups to generate a 10X or 20X return through an acquisition or other exit, while the remainder of the companies in the fund either fail completely or struggle to return the original investment. The appeal of a “10-bagger” or more gives rise to a “swing for the fences” approach in venture investing – where the VCs look for ideas that will be world-changing, transformative ideas like the next Facebook or other Internet startup. This mindset has given rise to a lot of me-too ideas and a herd mentality among Silicon Valley firms, with accommodating capital markets and cash rich strategic acquirers providing the financial resources to accommodate a lot of undisciplined investing into losses.
Targeting established industries
Industrial technology investing requires a more disciplined approach typically. A key difference is that the markets tend to be smaller, more mature, and often focus on specific industries. As Ben Steven of Momenta Ventures terms it, Industrial IoT is more of a “brownfield” discipline -- and “brown is the new green.”
A billion or bust (most of the time)
An example of the “swing for the fences” VC mindset is the focus on investing in ideas that could scale to a billion users. Entrepreneur Peter Diamandis of Singularity University often frames the ability to become a billionaire as arising from the ability to touch a billion people. Certainly the rise of hyperscale internet giants has inspired far reaching visions for startups – though most will fail.
Vertical tenacity to create lasting value
Looking at industries like energy (both Oil & Gas and renewables), autos and other transportation, manufacturing, agriculture, health care and Smart Cities, the extent of the potential impact from the application of new technologies to existing business processes and established value chains is not going to touch billons like a hot mobile app. However, the ability to deliver quantifiable value to users can be far more predictable, and while adoption rates may be more deliberate with rates in the double digits rather than exponential growth – the customer relationships will be deeper and ‘stickier’ over time.
Where there could be opportunities in manufacturing
Many of the opportunities for industrial IoT come from oblique forces, and solutions are less sui generis and more combinatorial in nature. As an example one might highlight how growing US-China trade tensions and tariffs may force American manufacturers to seek out new solutions to improve productivity in order to accommodate higher domestic labor costs. This might require a solution that could enhance visibility into the manufacturing process – providing improved just-in-time order flow of raw materials and input. This could also involve implementing a predictive maintenance solution for capital equipment in the factory floor to avert potential downtime from machine failures – helping to maximize the efficiency and coverage of highly skilled technicians while avoiding the loss of valuable production time. Other solutions might include new automation for rapid retooling on the assembly line to respond to real time market demand changes for specific product configurations, or Augmented Reality applications for field service workers to leverage repositories of product and repair data far from the home office. All of these ideas are valuable for the end users, but they are likely to be solid annuity-type businesses not volatile high-growth startups.
Investing in Connected Industry demands expertise in industry, an understanding of the unique dynamics of existing systems and processes, and the ability to harness cooperation across traditional industrial or operational technology experts and combine the latest innovations in connectivity, sensors, hardware, big data and analytics, AR/VR and other technologies with business context. The results of successful investing can be highly profitable, but more importantly, sustainable annuity-like businesses for many years to come. Like the proverbial contest between the tortoise and the hare, slow and steady wins the race when it comes to Connected Industry.
To gain more of a Ventures perspective on investing in Connected Industry, register for our upcoming webinar - Venture Industrialist: Investment Strategies for Connected Industry.
Momenta Partners encompasses leading Strategic Advisory, Talent, and Venture practices. We’re the guiding hand behind leading industrials’ IoT strategies, over 200 IoT leadership placements, and 25+ young IoT disruptors. Schedule a free consultation to learn more about our Connected Industry practice.