Investing in the potential of the Internet of Things
Whilst the Internet of Things (IoT) as we understand it has been around for about a decade, for quite a lot of that period it was hard to understand how much of the conversation surrounding it was simply hype.
It seems, however, that in this case the hype is justified, says Charlie Ross, investment director at Livingbridge. According to Gartner, there were around 8.4 billion connected devices in existence in 2017; a number expected to reach more than 20 billion over the next two years.
A simple concept, IoT is essentially a network of devices – from wearable fitness trackers to connected machines on a smart factory floor – each of which contains technology that enables it to send and receive information via the internet. Its true power, however, lies in the data these connected devices generate, providing constant feedback on how they are performing, where they are located, and how they are being used.
The potential for harnessing this data is frequently discussed in terms of how it can be used in a consumer context. Car insurers can use connected telematics to price policies according to the behaviour of individual drivers, for example, while some smart fridges will remind their owners to order more groceries when stocks are running low.
From an investor’s perspective, the bigger opportunity for this wealth of data is almost certainly in its use by business-to-business applications, through which it has the potential to revolutionise the way organisations operate across all industries.
A recent report revealed that, in a bid to improve efficiencies, more than two in five manufacturers had already implemented smart factory technologies such as employing sensors to alert when a machine requires maintenance, or building connectivity into products that report back on how they are being used. A further third were in the process of implementation.
The retail industry too, is increasingly using IoT technology and tracking products and components as they move through complex supply chains is becoming commonplace. To capitalise on such exciting potential, investors are looking to identify those technology companies developing the tools and solutions currently powering IoT’s rapid expansion.
Globally, IoT has seen more than US$30 billion (€25.96 billion) in VC funding to date, according to estimates by Bain & Company. Many of these businesses will either be very large or at a very early stage, making it difficult to predict just who the winners will be. There are a growing number of bankable opportunities in which investors are interested, but in order to identify these, it’s important to assess the themes that are likely to feed into future demand.
IoT cybersecurity, for example, is a hugely attractive sector, especially given the massive demand for the tools and technologies needed to protect connected devices which, until recent massive botnet attacks made the headlines, had been largely overlooked.
Creating competitive advantage
Another exciting opportunity lies in identifying those businesses that have achieved a competitive advantage as a result of their early adoption of IoT technologies. Forward-thinking business leaders in sectors such as agriculture, healthcare, and energy have already begun to deploy IoT tools.
The most successful of these are already enjoying enhanced profitability, and believe their investments will help secure longevity, by future-proofing their business operations and protecting them from disruption by new entrants to the market.
In short, an organisation’s use of IoT technology will soon become a key competitive differentiator and, therefore, an important criterion to be weighed by any investors considering a stake. And as adoption increases so do the pure-play opportunities. IoT technologies that can offer a solution targeted for particular industries and sectors are particularly atttractive.
Questions and considerations
Businesses themselves need to pay attention to the opportunities afforded by the IoT, as those slow to respond can find themselves asked why they are overlooking a technology that has been estimated could contribute more than US$11 trillion (€9.52 trillion)a year to the global economy.
Management teams should be considering questions such as where in their business IoT tools could add value, what their competitors are doing in the area, and where the technology could be used to make the quickest wins on cost savings and revenue enhancements.
Those businesses able to answer these questions more rapidly than their peers have a very real chance of accelerating their growth and consolidating their market leadership. The businesses able to do so, and in turn the technologies they use to deliver this, are both enticing propositions for investors.
The author of this blog is Charlie Ross, investment director at Livingbridge