The Internet of Things (IoT) is one of the hottest markets for attracting investors. Large companies, including Google, Samsung, and Cisco are joining the race by investing in or acquiring IoT startups. In 2014, investors contributed over $300 million across 97 venture rounds to IoT startups with record quarterly seed and A rounds.
But because IoT is garnering so much funding, competition is heating up. To get investor attention as an IoT startup, there are certain things you need to keep in mind. Although there are lots of opportunities within this hot market, there is also a greater need to prove your idea is better than the thousands out there.
To attract investment, here are some things every IoT startup needs to know:
Value Proposition: An IoT startup is valuable not because of its product but because of its product’s ability to collect the data that seems to be driving everything today and will be in the future. Its other true value lies in helping make that data relevant and usable.
As Jiani Zhang of IBM explained in her blog on IoT:
“A lot of people think about IoT in the area of sensors and wirelessly connected things, such as lights that turn on through an app. But actually, the Internet of Things is about much more than things; it’s also about the insights and capabilities that connectivity provides and how these new capabilities can create better value.”
Degree of Disruption: You have to create a degree of disruption that leads a significant amount of people and businesses to switch from traditional legacy businesses to yours. Look at how Uber and Lyft have disrupted the taxi and public transportation markets. You have to be the IoT business that does that for an industry or business segment. An investor wants to work with a disruptor or, at the very least, a startup that comes in right after a disruptor and something slightly different.
For example, Nest is in the smoke alarm and thermostat home automation business but was able to disrupt the home automation marketplace. Google recognized Nest’s disruptive potential and acquired it in 2014.
Monetization: You will need to show how you can monetize your IoT business idea and generate a viable, sustainable business model. Although Cisco has reported that IoT has the potential of generating over $19 trillion of value in the coming years, a CapGemini Consulting report acknowledges monetization as one of the biggest challenges for companies.
You might think it will all be rainbows and unicorns because you are solving a major problem for your target audience. But an investor is primarily concerned with returns and the monetization potential of your startup. To attract investors, you will need to create a detailed business model to illustrate how you can best capitalize on upcoming monetization opportunities.
Must Have vs. Nice to Have: Although investors see the potential that IoT has, many consumers still view many IoT products and services as “nice to have” items. What will generate the return an investor wants from an IoT startup is to partner with products and services that dwell in consumer minds as “must have” items.
Target is opening spaces like Open House to help consumers move from the “nice to have” to the “must have” by visually showing them how their lives can be transformed through IoT. Visual representation of how IoT products connect with other products is a great way to get noticed by investors.
As Salil Pradham, a venture partner and early stage investor with Draper Nexus Ventures and the head of the Nothings Fund said:
“When we decided to invest in Notion, … a company that makes sensing devices to monitor everything in your home through your smartphone, our decision was based on their ability to fill a need in the high-demand area of IoT known as home automation, which has already shown to have high growth potential, a solid business model, and growing demand among homeowners. This type of criteria is also fueling our interest in other IoT startups that provide connectivity and relevant data related to other aspects of a consumer’s life.”
Considering all of this, you need to determine whether your big idea has potential. What do you think investors are looking for in an IoT startup?