Internet Of Things: Overhyped or Investment Opportunity?

10.07.14
Features

Although the Internet of Things (IoT), also known as the Internet of Everything, is in its early stages, significant growth and development have already been achieved, with the potential for growth levels perhaps never before seen. IoT refers to the interconnectedness of computing-based devices within the infrastructure of the Internet. The recent trend of “smart” devices serves as the beginnings of IoT, with futurists, economists, engineers, and venture capitalists all foreseeing IoT and ubiquitous computing eventually leading to the automation of nearly all industries. As a result, IoT is generating a great deal of attention for both the general public and the investor universe. While several IoT start-ups have been snapped up early in their development cycle via acquisitions by technology industry giants, many others are receiving substantial amounts of growth capital from private equity and venture capital firms, a trend that, like the IoT industry itself, is anticipated to accelerate.

The hype surrounding the expansion of the Internet of Things has been criticized by some as just that for now — hype — as peak adoption is still more than a decade away, but the groundwork is being laid for what is expected to be a giant of an industry. According to Gartner, a leading informational technology research and advisory firm, there are expected to be approximately 26 billion devices on the Internet of Things by 2020. Public opinion polls have also surveyed the possibilities for IoT. A recent study performed by the Pew Research Internet Project found that 83 percent of survey participants believe that IoT will have beneficial, widespread effects by 2025. Gartner figures additionally forecast that the IoT industry is still 5 to 10 years away from reaching its peak productivity. It estimates industry-wide revenue figures to be in the $300 billion range in the year 2020. Yet, some of that hype and those forward-leaning projections of success are already happening today as technology advancements associated with the Internet of Things have near-term implications for a wide array of industries and sectors.

Certain industries provide readily available opportunities for growth investors, namely in IoT infrastructure, smart home goods and appliances, and wearable devices. Firms like Jasper Wireless build and provide the infrastructure on which Internet of Things connectivity is based. Since its founding in 2005, Jasper has raised $148 million in capital from venture capitalists and institutional investors, namely Alliance Bernstein, Sequoia Capital, and Benchmark Capital. Jasper’s platform is highly scalable, rendering the firm’s ability to expand rapidly. Jasper works with over 2,500 firms globally and its success to date largely stems from its innovative role as an infrastructure builder. IoT requires strong, stable network infrastructure to establish computing-based devices connectivity, and firms like Jasper demonstrate the potential for extraordinary growth.

Electric Imp is another technology firm providing IoT network building through the use of cloud computing and embedded hardware and software platforms. The firm was founded in 2011 and, currently, its chips are embedded in over 500,000 devices connected to the Internet. A strategic partnership with consumer electronics manufacturer Foxconn will allow its hardware chips to become more ubiquitous, enabling Electric Imp management to focus on its software and cloud computing platforms. In 2012, Electric Imp raised $8 million from Redpoint Ventures and Lowercase Capital. In August 2014, it received $15 million in Series B funding from PTI Ventures, Rampart Capital, and Foxconn. This cash will aid in its research and development efforts toward achieving its goal of enabling previously “dumb” devices to connect to the internet in addition to solidifying its status as a leader in the IoT chip manufacturing industry.

Advancements in IoT infrastructure like those above have in turn accelerated the adoption rate of consumer products enriched with internet connectivity. Consumer-oriented industries such as connected cars and connected home management devices are seeing real traction, with several companies having already attracted investors and in the midst of executing successful business models. To date, Nest Labs has served as the most notable success story in the home automation industry. Founded in 2010, Nest Labs, which makes smart thermostats and smoke alarms for homes, received several rounds of venture funding from Kleiner Perkins Caufield & Byers, Lightspeed Venture Partners, and Google Ventures. In January 2014, Google, Inc. purchased Nest Labs for $3.2 billion. Although now a Google business, Nest Labs continues to be run by its founder and Chief Executive Officer Tony Fadell, who embraces Google’s vision of a connected world. Nest Labs and other home automation companies have been extremely successful recently, in large part due to industry-wide trends of declining costs of hardware and input components.

Closely related to connected home management devices such as Nest are the so called “white goods,” namely refrigerators, washers and dryers, and ovens, that will be connected in rapidly increasing quantities in the coming years. This establishes the relatively immediate need and importance of an IoT market that builds infrastructure and services the connectivity of these devices and appliances. The wearable devices industry, which has already garnered significant attention, will also continue to gain steam. Large technology corporations like Apple are devoting more and more of their research and development budgets to wearable technology products. Apple launched its Apple Watch in September 2014 with the product being available for sale in late 2014 or early 2015. Nike has also began work on products that integrate Internet-connected, smart components into athletic apparel for users to make the most out of their training experiences.

Independent growth stage technology companies that focus solely on IoT have also attracted substantial attention and investment. For example, Jawbone, founded in 2006, specializes in wearable technology products such as portable audio devices, personal health monitors, and connected headsets. Jawbone has raised over $500 million in venture capital funding, including a $250 million raising from Rizvi Traverse Management earlier this year. Jawbone has raised an additional $100 million through debt and equity financing from institutional investors. The most recent round of funding will enable Jawbone to allocate tremendous resources to its research and development efforts of its UP wristbands, personal health and fitness monitoring systems. Jawbone’s founder and CEO Hosain Rahman sees the future of the connected wearables industry allowing consumers to use their connected wearable devices to interact with smart, IoT devices in their homes.

The excitement surrounding the IoT space has notably increased in the past year and is drawing greater attention of growth investors. Early players have largely been those laying the infrastructure networks (chips, sensors, fiber optics, data processing services) on which the IoT framework will rely upon. This will lead to an evolution in which entrepreneurs and technology companies develop practical applications and tangible consumer devices available to end users. More work must be done in terms of building the infrastructure for IoT in order for these products to reach their maximum potential, but some consumer products have already found useful applications that have been widely accepted by the market. Thus, growth investors may look to both IoT infrastructure and consumer-manufacturing companies as the promised “peak IoT” evolves and comes to fruition.

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