Interesting article by Alicia Asin at Libelium in GigaOm about funding for the Internet of Things. Alicia suggests there are three main sources of funding for IoT companies: Public, Public/Private Partnerships, Crowdfunding. It is a fair overview in many respects but I believe the article (and some of the comments) dismisses, unfairly, the impact of venture capital from dedicated venture funds AND indeed corporate ventures on the long term strength of the sector.
Each of the three funding sources that Alicia identifies has a place.
- Public Funding: from e.g. EU, has put money into a lot of academic and industrial collaboration projects though many of these are a very long way off getting to a point where they will have any meaningful impact on commercial activities.
- Public/Private Partnerships: i.e. Large companies working in partnership with e.g. where a city invests in a ‘Smart City’ or ‘Smart Transportation’ project that is usually delivered a a trial project with a view to rolling something bigger out should the trial be a success. In my view, the funding for these projects however is still coming from the public sector so should really count at ‘Public Funding’. there aren’t too many companies that can afford to invest in this type of project, not should they, unless they can see a clear ROI. Most private companies will be reluctant to do this given the noise around these projects at the moment.
- Crowdfunding: Funding the development of a product or project using crowdfunding. A rapidly emerging source of funding and the news this week that Kickstarter has funded over $1 billion of projects in its life is validation that the model can work. HOWEVER, typically, this type of funding is most appropriate for smaller projects rather than raising significant funding to support the growth of a business. The vast majority of crowdfunded projects are for significantly less than<£50k.
So where is ‘venture capital’ in all its forms in this discussion?
Well, it is probably not going to have much of an impact on the types of projects that are either publicly funded or crowdsourced? Why, very simple, neither option is likely to be seen as being evidence that the type of project that takes those types of money will be a commercial success that offers an investor a return on their capital. Investors, both independent and corporate, will want to fund projects that offer a return on the money they invest (though there are some corporate funds that have another purpose i.e. helping their organisation learn about the IoT).
So where is the venture investment and how can we as an industry unlock the money? Actually, there is already a lot of money invested by venture funds into the sector. Intel Capital, as investors in e.g. SigFox, IQ Capital, as investors in e.g. Neul, DFJ Esprit, as investors in e.g. Greenpeak, Index, as investors in e.g. AlertMe), Amadeus Seed, are just some of the examples of active funds investing in the space.
All of these funds have something in common I think. They are investing in BUSINESSES, not projects, with an expectation of getting a financial return. They would probably regard public funds as, ‘soft’ – though they would never suggest to a company that they invested in that they should turn that money down. They would probably regard crowdfunded projects favourably if the crowdfunding received enough interest to actually be able to do something that moves the business behind it forward (i.e. they are using the crowdfunding as evidence of market demand). The flipside of a small amount of crowdfunding money raised by a company though could be taken by some investors as evidence that the entrepreneur is not being ambitious enough. Investors have a lot of deals to choose from. All their investment involve risk and they have to invest in projects that can show significant returns.
One of the most important things that we have to do as an industry at the moment, is understand very clearly what different investors – angels, venture firms, corporate investors want from a deal and understand the dynamics of the investor businesses if they are to attract equity funding of this type.
Some people, not unreasonably, want to know just one thing. This is a good 1 minute overview of ho you should frame a conversation with a professional investor.
The good news that we see is that serial entrepreneurs, who have attracted venture funding in the past for one or more companies, and who have achieved one or more exits for their investors are getting more involved in the sector. Niall Murphy, founder of The Cloud and Evrythng and Stan Boland, Founder of Element 14 and Icera before becoming CEO of Neul are but two examples and we know of a lot more that are working in the space under the radar at the moment. These entrepreneurs have made money for investors in the past and understand the language they speak as well as what investors need to see in a company they invest in.
This is one of the big topics that we will be considering at the next IoT Forum, April 15th 2014 where we have two discussion sessions: one focused on serial entrepreneurs and what they believe companies need to do to become successful in the market and; one on investors and what they are actually looking for. You would of course be mad not to be there.