The potential upside makes investing in startups worth the risk for the biggest tech vendors
Internet of Things startups have had little trouble finding seed money lately, with overall venture capital surpassing the $1 billion mark in 2013 alone, according to CB Insights.
Much of the funding comes from the venture branches of established tech companies, such as Cisco Investments, Qualcomm Ventures, and Intel Capital. These three in particular have contributed a significant amount of funding for IoT startups in the past three years, according to CB Insights. The following graph shows how the reach of these three firms has grown throughout the Internet of Things startup world from December 2010 to May 2014.
Investment in IoT startups has come from companies across the board – from Cisco to Google to GE – and shows no signs of slowing down. Cisco announced a $150 million fund for IoT startups in late April, part of which will help fund an IoT-specific program in the Alchemist Accelerator, where companies will receive an average of $28,000 in seed funding, Venture Beat reported. That’s a small investment for a company like Cisco, but it could provide a healthy return later on if the accelerator helps Cisco identify young talent or cheap acquisition targets.
Ultimately, investing in these young companies can help foster overall growth in a market in which established tech companies see a lot of opportunities. Gartner has estimated that IoT companies will generate $309 billion in revenue per year by 2020, half of which will come from startups. A lot of that money will find its way back to companies like Cisco, Qualcomm, and Intel as IoT drives up demand for hardware components and network equipment. It only makes sense for established tech companies to help this market get off the ground.
But startups are naturally, and infamously, risky. The statistics on the startup success rate range from bad to worse. Depending on who you ask, anywhere from 75% to 90% of all startups fail. If the plan is to help create growth in the Internet of Things market or industry, why roll the dice on risky ventures?
Part of the reason is that startups are lean and nimble and can experiment more freely than a massive tech company, Gartner research director Alfonso Velosa says.
“Absolutely, there is [risk], but if you think about it, what these companies have is the flexibility to experiment quickly, which is not something you often see at major companies,” Velosa says. “You just have to follow their process, their procedure, their different sets of standards, so one of these things that these startups provide is a series of experiments that they can conduct in-house, so when they determine which ones are successful, they can then come in and acquire the rest of their investments. So it’s actually a reasonably common strategy to get over some of the normal inertia of a mega vendor.”
Of course, the tech vendors that stand to benefit from a healthy IoT market could just sit back and let the pure-play venture capital firms cultivate the market. In that scenario, though, the startups that are most attractive to the vendors’ market strategies miss out on the benefits of their support. Ideally, corporate ventures will provide only the kind of assistance that helps improve a company’s chances of success without impeding their creativity.
“These are just logical investments that align with the overall corporate go-to-market strategy. That doesn’t mean that they’ll have hands-on investors, but it will mean that they will also provide additional help and support to these companies,” Velosa says. “As an example, Cisco highlights some of its Internet of Things investments at its Internet of Things World Forum meeting. So it does a variety of things to help them, as well as having at least one or two board members.”
It’s no wonder that Cisco sees the Internet of Things reaching 50 billion connected devices by 2020. With its eyes on the startups creating these devices, Cisco increases the chances not only that the ecosystem reaches the 50 billion-device milestone, but that many of those devices align with its own strategy.
