The Internet of Things as Seen by Venture Capitalists – Massive and Inevitable

 

 

Connecting billions of objects to the Internet—a process that we call “Instrumenting The Real World”—is going to have a transformative impact on the enterprise and on society, and we’re still only in the very early stages of this change.

Martin Giles, Partner at Wing Venture Capital (San Francisco, CA)

Kudos to Martin and his team for his excellent outlook on the Internet of Things (and for generously sharing the slide deck here) and for keeping us up-to-date on the Wing blog here. Wing built a database of 2335 accelerator and venture capital funding deals for IoT startups from the start of 2013 to the end of August 2016, drawn from helpful services like Mattermark, Pitchbook and Crunchbase.

“Gaurav Garg, one of Wing’s co-founders, draws an insightful parallel between the Internet of Things and the spread of electricity to US households in the 1900s. As electrical power made its way into more and more homes, entrepreneurs set to work developing new products to take advantage of this phenomenon. But it took decades for some of the most innovative applications to appear. Many of these, from the television to the microwave, were simply impossible to conceive of in the early days of electricity. The Internet of Things is at the same stage today as electricity was in the early 1900s: we can see the potential of this new wave, but only a small fraction of things are currently connected to the internet.” Here are the key findings of Wing Capital:

Grassroots entrepreneurial activity still appears moderately healthy, though there are signs of a slowdown.

GitHub is a pretty good temperature gauge of early project activity, and the number of GitHub code repositories that have IoT as a keyword is on track to more than double this year according to publicly available data. Successfully funded IoT-related projects on Kickstarter are also set to rise again in 2016, but the pace of growth is slowing.

Industrial/Enterprise IoT accounts for the largest number of funding deals over the past few years, followed by Wearables.

The Industrial/Enterprise category came out on top (over all verticals) with almost 600 deals (stemming from) the “Factory or Industry 4.0” era, in which a combination of sensors, software and back-end cloud compute and storage is giving companies new insights into the performance of their physical assets. On the Enterprise front, we saw a reasonable amount of activity in sub-categories such as building management services, healthcare and retailing.

Picture Credit: Dell Automation

Ranked by average deal size in dollars, the Auto/Transport category comes out on top

Auto/Transport sector yielded the largest ave $/deal with an average of almost $8M a deal (yet the fewest number of deals.). Yet companies such as Tesla and Uber have inspired startups working on connected car and autonomous driving technologies, the two biggest sub-categories within the Auto/Transport field. This year has seen some big exits in the form of General Motors’ acquisition of Cruise Automation, a connected vehicles startup, and Uber’s purchase of Otto Motors, a driverless truck startup.

In the Drones category, hardware deals still dominate, but we also saw a lot of startups working on applications for aerial surveying and mapping, as well as inspection and monitoring

The Drone category is really open territory, at least in the non-military arena: hardware, drone-level innovation to optimize enterprise services (like aerial surveying and monitoring), software and analytics. 3D Robotics, pivoted towards offering drone-based services to enterprises after facing intense competition in consumer hardware from DJI, its main Chinese rival.

In 2016 four IoT categories are likely to see fewer deals than the prior year, while four others will see an increase over 2015

The number of deals in all of the high-level categories that we tracked rose every year from 2013 to 2015. This year will break that trend. Four of the categories—Industrial/Enterprise, Wearables, Home, and Robotics—will see a decline in deal activity in 2016. Meanwhile, four others—Drones, Infrastructure (which covers startups developing building blocks for the IoT, such as low-power wireless connectivity), Health and Auto/Transport—will grow again.

In terms of funding activity, the number of IoT startup deals in the sub-$2M range will decline in 2016, while the number of those in the $2M-to-$20M range and the $20M+ range will increase

The number of larger deals is expanding, which is an encouraging sign that at least some of the startups founded over the past few years have developed business models that are inspiring follow-on financings. The growth in deals above $20M is especially notable: there are likely to be five times more of these this year than in 2013.

The number of large M&A exits involving IoT businesses is set to expand again in 2016

Pitchbook (data) showed that the number of M&A deals over $200M is set to increase again in 2016, as a sign that incumbent firms who see the Internet of Things as an opportunity are willing to commit significant sums of money to acquisitions. This year has already seen some billion-dollar-plus M&A exits. Sensus, a smart meter company, was bought by Xylem for $1.7Bn, and Jasper, an IoT connectivity management platform, was acquired by Cisco for $1.4Bn.

There’s been a proliferation of IoT platforms and this outbreak of ‘Platformitis’ is likely to lead to a shakeout over time.

“Platform” deals totaled 707, or almost a third of our entire data set, with the largest number of platform deals were in the Industrial/Enterprise category, which is understandable given that customers there are looking to connect a wide variety of devices at scale. The second largest category was the home: people want the smart devices in their homes to work together seamlessly.

There have been relatively few deals for IoT-focused security startups

In our overall database of over 2300 deals, we found just 45 that were for IoT security startups. That is a surprisingly low number given all of the risks associated with connecting billions of new devices to the internet—risks that have been highlighted yet again by recent events, such as the use of IP cameras and other connected objects like home routers to launch a massive Distributed Denial of Service attack against Dyn, a domain name service provider, and another case in which hackers were able to take control of a Tesla Model S from 12 miles away.

Wing’s Peter Wagner adds, “data-first services are starting to emerge in many of the major enterprise-application categories. Companies such as Vlocity in customer relationship management (CRM), Moogsoft in IT operations and Kanjoya (now with Ultimate Software) in human resources are among startups driving the new, data-first approach.” These data-first applications are: flexible, architected on a scalable data-centric core, heavily reliant on embedded algorithms, and are iterative – creating “a virtual breeder reactor of business-process optimization and insight generation.” Wow, that’s a tech endorsement !

 

G3 Level Solar Storms and Disruptions to Satellites and the Power Grid Increasing

Picture Credit: NOAA

IAI has dedicated some time recently to investigating long term economic threats to the U.S. economy in conjunction with recently becoming a Fellow at the American Center for Democracy. I have already written about the threat of cyberwarfare for ACD and they focus on this area in their Economic Warfare Institute. The preservation of independent policy making institutes like ACD is essential to protection of the First Amendment. For policy wonks, the linkage between economic threat events and totalitarianism was postulated by Fromm (1942) and Rickert (1998) who found that systemic changes in the economy led to declines in real incomes and increases in economic equality.

Nothing then is unchangeable but the inherent and unalienable rights of man.

Thomas Jefferson, Letter to John Cartwright, June 5th, 1824

Like Black Swan events in the stock market, economic threat events are infrequent in occurrence but have material consequences and usually involve economic losses. The same is true for weather / space events as the author of Black Swans and Antifragility, Nassim Nicholas Taleb, has pointed out recently. Statistician Taleb has extensive knowledge about risk management and has about written “ruin events” in a series of papers. He writes, “Our concern is with public policy. …Policy makers have a responsibility to avoid catastrophic harm for society as a whole; the focus is on the aggregate, not at the level of single individuals, and on global-systemic, not idiosyncratic, harm. This is the domain of collective ‘ruin’ problems.”

On Tuesday, October 25th, 2016, magnetically charged solar particles triggered a G3-level geomagnetic storm which threatened power grids, satellites and radio navigation systems, according to NOAA’s Space Weather Prediction Center (SWPC). PJM Interconnection LLC, operator of the biggest U.S. power grid, and Midcontinent Independent System Operator (MISO) which manages high-voltage transmission lines across 15 U.S. states and one Canadian province, issued geomagnetic disturbance (GMD) warnings on Tuesday and MISO is conveniently running an Emergency Operating Procedure (EOP) Coordinating Workshop today.

Northern Lighthouse Project estimates that a strong G3 storm occurs 200 times in each 11 year solar cycle.

A G2 storm alone (our current state) affects RF radio propagation (shortwave communications) and high-latitude power systems which can cause voltage alarms, and long-duration storms may cause transformer damage. ore auroras are in the offing.  SpaceWeather.com warns that, “this solar wind stream is broad and fast; it is currently blowing 700+ km/s and is expected to influence our planet for some days to come.  High-latitude sky watchers should remain alert for auroras on Oct. 26-27.”

Based on the loss of instrument use in the 1950s due to “radioflash”, the British have studies electromagnetic pulses for a half century, as the Telegraph reports. In a recent  report (and summary) by the Royal Academy of Engineering into space weather and its potential impact, UK science and industry experts have analyzed the likely impact of the most extreme space weather on technology.

 

Picture Credit: Markets-S.Murray@SpaceWeather.com

Truly beautiful but tough on electronics, these auroras are forcing the Internet of Things (IoT) system developers (like IBM) to consider the impact of communication disruptions. And, more critical than having your fridge fail to order a new loaf of bread, blockchain networks operations are critical to the Internet of Value (IoV) or the ValueWeb. For the unintiatiated, IoT is becoming pervasive and is being embedded in buildings, the environment, automobiles, households and in everything that can host a sensor, as IBM broadcasts in this video.

“It’s not so much about the emergence of new technology, it’s the convergence—the ability to use sensors for everything in the world to basically be a computer, whether it’s your contact lens, your hospital bed, or a railway track.”

Harriet Green, General Manager,  IBM Watson Internet of Things, Commerce and Education

Some organizations are being left behind as GovLab points out in “Value and Vulnerability” that we, “encourage state CIOs to make IoT part of the enterprise architecture discussions on asset management and risk assessment and to develop an IoT roadmap. States must consider security, privacy, accessibility and standardization when crafting a roadmap for IoT.” Wise advice indeed…

Blockchain Gaining Widespread Adoption but FinTech Poses New Risks

Picture Credit: Oliver Wyman in WSJ -CIO Corner

Most financial professionals have heard about Bitcoin and early ValueWeb proponent George Howard  quipped that blockchain is a “distributed database that sequentially records transactions.” Bitcoin is simply the earliest example of some 750 cryptocurrencies. Ever the evangelist, Howard and many billionaires like Microsoft’s Gates, PayPal’s Thiel, Virgin’s Branson, and Google’s Schmidt (among others) have embraced blockchain as a disruptive technology:

Never has it been more important than to be the “patient zero” of a meme that goes viral; to coin a phrase that becomes part of the vernacular; to be the first to write, sing, paint, or otherwise express something that establishes you as a “creative,” a thought or key opinion leader.

LetsTalkPayments.com (LTP) explains that, “The blockchain network consists of nodes, i.e. distributed servers. All the nodes can accept and process the transaction. The nodes on the network share information about the candidate transaction.” A distributed ledger, above right, is a network that records ownership through a shared registry. 1) The devil is in the details as payments get approved autonomously when a “majority” or credentialed nodes accept a transaction and these systems can be overwhelmed or manipulated due to very uneven liquidity (look up the Koinify case). The technology could cut financial services firm costs by up to $20 billion annually by 2022, according to Santander’s Finextra.

“Blockchain technology continues to redefine not only how the exchange sector operates, but the global financial economy as a whole.”

–  Bob Greifeld, Chief Executive of NASDAQ

Earlier this year, bitcoin expert Chris Skinner released The ValueWeb (available on Amazon) which explained that the Internet of Things (IoT – or sensor-enabled machines) cannot operate in the framework of the old payments system and needs an Internet of Value (or “Valueweb”) to function.  Chris’s fall 2014 book Digital Bank explained how the planning activities of incumbent banks (Barclays in the UK and mBank in Poland), new start-ups (like Metro Bank), and disruptive new models of banking (like FIDOR Bank in Germany) and finance (like Zopa and Bitcoin) signaled early ValueWeb adoption. The problem with traditional banks is that they are a captured oligopoly with privileged access to the clearing systems at national central banks with excessive leverage and inadequate regulatory compliance and enforcement. 2) The breakup of the fiat or fractional banking system is another important looming risk from blockchain to a next generation ValueWeb payment system. Nonetheless, Business Intelligence cites KPMG data as demonstrative that this Fintech market opportunity is getting funded fast.

LTP beautifully details how the Blockchain Platform is being used for various use cases and business models such as:

– Crowd Funding – Blockchain Technology is being applied to the crowdsourcing platforms. When individuals are granted certain responsibilities or chunks of business, a blockchain-like system could determine which of those individuals are worthy of credit. Blockchain has the potential to make crowdsourcing smooth and secure. Examples of such companies are  BitcoinCapital (a fund from RT’s Max Keiser), Koinify (which failed) and others. Max’s partner Simon Dixon of the BankoftheFuture explains the blockchain opportunity here and transactional vehicles like StartCoin.

– Identity Management-  In the field of identity management, user first scans his/her identity document and then signs it. Then, the mobile app will generate a private and public key to seal that record. It is encrypted, hashed and sent to the network of communicating nodes running on the Blockchain network. Examples of such companies  are  ShoCard, BlockChain Factory and others.

– Smart Contracts – A cryptographic Blockchain is  used to digitally sign sensitive information, and decentralize trust; and this is being used to develop smart contracts and escrow services, tokenization, authentication, and other services. Examples of such companies are  Symbiont, SAE and others.

– Remittance – Blockchain protocols are used by many companies already for P2P money Transfer across international borders. Its a segment worth $500 B. Examples of such companies are Ripplelabs, Bitspark  and  BitPesa.

– Data Management & Analytics – Blockchain-based identity ledgers are used  in database management and data analytics to support various application. Examples of such companies  are  Factom, numsight and others.

– Trading Platform – Using Blockchain technology, individuals and firms can  produce and exchange financial contracts. This peer-to-peer contract creation and settlement means that all transactions are cleared on the Bitcoin Blockchain with no intermediary involved. Examples of such companies  are Kraken, Nasdaq, Mirror  and others.

Last week, twelve large banks in the 70 member R3 Consortium (Barclays, BMO Financial Group, CIBC, Intesa Sanpaolo, Macquarie Group, National Australia Bank (NAB), Natixis, Nordea, Royal Bank of Canada (RBC), Santander, Scotiabank, and Westpac Banking Corporation) just participated in a trial to demonstrate cost-cutting and increased efficiency of cross-border payments using startup Fintech player Ripple’s ‘digital asset’ XRP.

The Financial Stability Oversight Council (FSOC), a US Treasury entity, warned that blockchain technology and marketplace lending could present risks to financial stability. Henry Blodgett’s (of dot.com hype and convictions) BusinessInsider does cover blockchain closely which lists other risks:

• Marketplace lending. FSOC warned that marketplace loan investors could become less willing to fund loans during a trough in the business cycle, increasing the risk of the model. It also said that as the number of marketplace lenders competing with traditional lenders rises, they might lower their underwriting and loan administration standards in order to attract customers. This would likely mean riskier loans.

• Blockchain technology. FSOC suggested that risks associated with blockchain may not emerge until solutions are deployed at scale, because of participants’ limited experience with the technology.

• Blockchain fraud. FSOC also said that some blockchain systems could be vulnerable to fraud, if a significant minority of participants colluded to defraud the rest (as the role of centralized intermediaries diminishes).

• Regulatory diseconomies. FSOC also highlighted that financial firms using blockchain-based systems may operate over multiple regulatory jurisdictions or national boundaries.

Still interested ? MIT offers a FinTech certificate for a twelve week course starting November 21st, 2016 for $2600 – Cambridge is more fun than online.